The best thing about the stock market is that you can make money in either direction. Historically, stock indexes have tended to trend up over the long term. But when you look at individual stocks, you'll find plenty of stocks that lose money over the long haul. According to hedge fund institution Blackstar Funds, even with dividends included, between 1983 and 2006, 64% of stocks -- nearly two-thirds -- underperformed the Russell 3000, a broad-scope market index.
A large influx of short-sellers shouldn't be a damning factor to any company, but it could be a red flag from traders that something may not be as cut-and-dried as it appears. Let's look at three companies that have seen a rapid increase in the amount of shares currently sold short and see whether traders are blowing smoke or whether their worry could have some merit.
Short Percentage Increase Jan. 13 to Jan. 31
Short Shares as a Percentage of Float
Eldorado Gold (NYS: EGO)
SunCoke Energy (NYS: SXC)
Carnival (NYS: CCL)
Source: The Wall Street Journal.
Just because gold is near an all-time high doesn't mean that every gold stock is a buy. Apparently short-sellers agree, because they have piled unforgivingly into Eldorado over the past two weeks. But are short-sellers missing the big picture here? I think so.
Eldorado continues to expand its production and does so with very minimal increases to its mining costs. In 2011, overall mining costs for gold were just $405 per ounce, and iron ore costs were $63.90 at its Vila Nova mine. Based on its 2012 forecast of 730,000 to 775,000 ounces of gold, Eldorado's production will rise by 11% to 18%, while its gold mining cash costs are only expected to rise by 6% to 11%. Not to mention that Eldorado took a page out of Newmont Mining's (NYS: NEM) book and tied its dividend payout to the price of gold, effectively giving shareholders a 50% dividend hike this quarter. With Eldorado trading at just 14 times earnings, short-sellers had better be very careful with this one.
It's the energy, stupid!
Forget the economy for a moment and focus on one of the few constants in both boom and bust markets: the need for energy. SunCoke Energy has battled a flurry of one-time expenses this year and an amendment to its contract with ArcelorMittal (NYS: MT) that removed the beneficial effect that higher coal prices had provided its metallurgical coal business segment -- and it has come out the other side looking stronger than ever.
SunCoke's metallurgical coal production jumped 24% to a record of nearly 1.4 million tons in 2011, and the company forecast a production jump to 1.8 million tons in 2012 -- another implied jump of 29%. Coal prices remain strong, and based on SunCoke's projected EPS guidance of $1.30 to $1.65, the company seems reasonably valued at just 10 times forward earnings. With one-time costs largely behind this recent Sunoco spinoff, short-sellers should remain cautious.
This Carnival's no fun
The tragic accident of the Costa Concordia that killed at least 17 people isn't just a financial nightmare for leisure cruise provider Carnival -- it's a PR nightmare that's bound to drag out for quarters to come.
Carnival has already been sued for $100 million for the accident last month, and there's a high likelihood that more lawsuits will follow. That has to be disconcerting for shareholders, with just $450 million in cash on Carnival's balance sheet as of last quarter as opposed to more than $9 billion in debt. With earnings estimates falling across the board, short-sellers have every right to be skeptical of the stock's near-term performance.
Guidance tells the tale this week. Eldorado and SunCoke have offered up convincingly strong growth prospects, while Carnival's are sinking fast.
What's your take on these three stocks? Do the short-sellers have these stocks pegged or are they blowing smoke? Share your thoughts in the comments section below and consider adding these stocks to your free and personalized watchlist to keep up on the latest news with each company.
Also, if you'd like to avoid the potential pitfalls that high short-interest can bring, I suggest you download a copy of our latest special report: "The Motley Fool's Top Stock for 2012." In it, our chief investment officer gives you the skinny on a company he has dubbed the "Costco of Latin America." Best of all, this report is completely free, but only for a limited time. Don't miss out!
At the time thisarticle was published Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong. The Motley Fool owns shares of ArcelorMittal. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy that never needs to be sold short.
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