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 profits.

These top companies on the Nasdaq stock exchange recently 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.

Frontier Communications (NAS: FTR)






Zynga (NAS: ZNGA)






Sources: 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.

A bad connection
Telecom provider Frontier Communications is caught in a difficult spot. As mobile communications grow, the importance of its landline business diminishes, even in rural areas. Rivals Windstream (NAS: WIN) and CenturyLink (NYS: CTL) have both seen some of the same challenges as they try to emphasize higher-margin services like broadband Internet to their traditional landline customers.

Frontier's revenues are steadily dwindling, falling 2% sequentially, and down 8% year over year. Its stock has fared even worse, falling 26% this quarter and down by more than half over the past 12 months. It reports earnings tomorrow and more of the same is expected: revenues down 7% and profits flat.

Of course, any surprise to the upside would catch short-sellers, well, short, but CAPS member kmv98finance isn't really worried about that happening:

It has an enormous amount of debt and it pays out almost all of its cash as dividends. It will have to cut the dividend to make its balance sheet better. This will cause the stock price to drop...probably should be a $2 stock.

Tell us on the Frontier Communications CAPS page if you think it has a lifeline, then add the rural telecom provider to your watchlist to see if it can ring up higher revenues.

Game on?
Social-media game maker Zynga is a stock I could love to hate, since I've had to block all the Farmville and Cityville updates from friends playing the games on Facebook. Yet right there it seems that there's a lot of potential, because people are playing its games. Words with Friends, a very close relative of Hasbro's Scrabble, is exceedingly popular, and if actor Alec Baldwin's getting kicked off an airplane because he refused to stop playing it is any indication, it's also addictive.

Zynga's first earnings report as a public company wasn't terrible, though it should come with a lot of caveats, because Zynga is so dependent upon Facebook. Should the social network stumble, look for Zynga to fall.

It also offered up the prospect that gamers aren't spending as much as anticipated on its games, so along with MySpace making something of a comeback because of its music player, there are any number of threats facing it.

With Zynga's stock up 50% in 2012, I'm going to rate the game maker to underperform on CAPS, driven in no small part by my annoyance at its persistence on Facebook. Emotional investing is never a good way to approach a stock, but there are other reasons to think Zynga won't be a good buy now. CAPS member Tburddd sees its current valuation as absurd and Jognils views the social-network buzz as little more than a bubble.

Add Zynga to the Fool's free portfolio tracker and let us know in the comments section below or on the Zynga CAPS page if there are additional reasons to dislike this company.

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 Dupreyowns shares of Hasbro, but he holds no other position in any company mentioned.Click hereto see his holdings and a short bio.Motley Fool newsletter serviceshave recommended buying shares of Hasbro. 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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