Do the Shorts Know Something You Don't?

Since everyone loves a winner, it's reasonable to assume that everyone hates a loser -- everyone but short-sellers, at least. These contrarian investors bet that hot stocks are primed to fall, aiming to turn their pessimism into potential profits.

These top companies on the New York Stock Exchange had some of the largest percentage increases in shares short. Combining that with the collective intelligence of Motley Fool CAPS, we'll see which of these companies Fools believe have the power to make short work of short-sellers.

Sources: wsj.com. Share counts in millions.

Of course, this isn't a list of stocks to buy -- or short! These stocks could have serious problems that warrant their short interest, but they might also be stricken by short-term troubles. Only Foolish due diligence will tell you for certain; our 180,000-strong CAPS community offers a good place to start.

Enter the dragon
They don't call it "the Web" for nothing. Chinese Internet stocks are interconnected, like fine strands on a spider's trap, and yesterday's disappointing profit forecast by search engine and Internet portal leader Sohu.com sent all related Chinese stocks plummeting yesterday. Search engine giant Baidu.com (NAS: BIDU) fell 2%, while online media company Sina dropped 5%.

The fear is that China's economy is slowing and the financial upheaval in Europe will hasten the collapse. Yet though they're connected, it doesn't mean they're all made the same. Sina's Weibo microblogging site is seen as the catalyst -- and risk -- for the company. If it can ramp up its revenue contribution, Sina will greatly benefit as its core business remains sound. While short-sellers are betting that Weibo will wobble, it has initiated a number of value-added services currencies, search, and paid account numbers, Sina is also considering targeted ads, social games, and e-commerce services.

If it all resembles throwing a lot at the wall to see what sticks, it also has the benefit of knowing that at least a few will gain traction. The partnership with video site Tudou looks promising, too.

The stock has responded to these actions by rising by a third over the past month, another sign short-sellers point to as suggesting it's poised for a reversal. Tell us on the Sina CAPS page if you agree, then add the Chinese online media portal to your watchlist to see if it can overcome the critics waiting to exhale on its rise.

Driving forward
The disk drive shortage due to last year's devastating Thailand floods probably had short-sellers expecting Seagate Technology would be inundated as well, though they undoubtedly weren't anticipating it would be with orders. The hard disk drive maker remained largely above the waters that temporarily hurt Western Digital (NYS: WDC) , as Seagate's Thai facilities were not located in the flood zones, so its customers weren't affected as much. But that didn't stop Seagate's biggest customers from seeing the potential for future ruin, and they signed on with Seagate for long-term supply contracts to ensure they wouldn't be shut out.

Typically, big customers are willing to set one drive maker against another to drive down the cost of the product, but they're seeing now the havoc created when supply is interrupted. Seagate derives an additional benefit because the shortages caused prices to soar, so it has both product and profit padding and customers are willing to pay.

Motley Fool blogger Justin Carley sees risk anyway, since disk drives are still a commodity and the market is moving toward solid-state drives.

The valuation story is moving toward neutral from undervalued, and I think it will maintain that momentum until it eventually reaches overvalued levels later this year. That would be an ideal time to sell. Having said that, I can't argue with those who think a 50% upside in a month in a commodity-like business is good enough.

Follow along by adding Seagate to the Fool's free portfolio tracker and see whether the threat posed by SSD makers like OCZ Technology (NAS: OCZ) come to fruition.

Don't sell yourself short
Share your views with the CAPS community: squeeze 'em till it hurts, or short 'em till the sun don't shine?

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At the time thisarticle was published Fool contributorRich Dupreyholds no position in any company mentioned.Click hereto see his holdings and a short bio. The Motley Fool owns shares of Western Digital.Motley Fool newsletter serviceshave recommended buying shares of Sohu.com, Baidu, and Sina. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

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