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 companies had some of the largest percentage increases in shares sold 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.

Source: 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 just such a good place to start.

Burning the furniture to heat the house?
It wasn't underwater mortgage owners or homeowners going through foreclosure that banking giant Bank of America agreed to help when it announced a new $50 billion initiative, but rather it said it would be spending that money over the next decade to combat ... climate change!

To be fair, B of A did also recently announce a new program to help preapproved short sales, but with foreclosures on the rise again, there would seem to be better uses for that other money. According to RealtyTrac, foreclosures spiked 9% in May, with one in every 639 housing units having a foreclosure filing. More ominous, foreclosure starts -- default notices or scheduled foreclosure auctions -- jumped 12%.

The $25 billion robo-signing agreement reached in February with the Department of Justice forced Bank of America along with JPMorgan Chase, Citigroup (NYS: C) , Wells Fargo (NYS: WFC) , and Ally Financial to restructure their servicing units to avoid additional fraudulent foreclosure practices. But the run-up in foreclosures is going to drive down housing prices again as seized properties flood the market, perhaps sending even more people over the edge. Seems there are some real good uses for $50 billion.

I've had a long-term underperform rating for B of A on CAPS because I expected the fallout from the financial mess of its Countrywide purchase to continue far beyond what many analysts expected, yet 85% of the more than 11,000 CAPS members who've weighed in on the bank think it will end up going on to beat the Street.

Tell me in the comments section below or on the Bank of America CAPS page whether you think it's time for the shorts to close out their position, and then add the stock to your Watchlist to see whether they end up getting caught short if they don't.

Riding the coattails higher
Although YM BioSciences' once-a-day treatment for myelofibrosis shows a lot of promise in early and mid-stage trials, the market for the drug doesn't appear to be particularly large that will allow for a lot of competition. With Incyte's (NAS: INCY) Jakafi already on the market, albeit a twice-daily dosage, the breakout opportunities seem slim.

While YM does have other drugs in its pipeline, they're really back-burner stuff. The biotech is focusing all of its energy on CYT-387. Now pricing could be the catalyst for the drug's success should it make it all the way through to approval, as rare diseases such as YM wants to treat typically command, but it can be a dual-edged sword that could cut it if it prices the drug too high. Just look at KV Pharmaceuticals and Dendreon to see what happens when you price yourself out of the market.

It seems, therefore, that short sellers are counting on the pump YM got to wear off quickly as the drudgery of further clinical trials wears on. While the CAPS community is generally supportive of YM's chances -- just one of the more than two dozen All-Stars weighing in think it won't beat the Street -- I'm maintaining my underperform rating if only because I think the exuberance the market has shown will give way to a more sober assessment.

Add your own thoughts on the YM BioSciences CAPS page or in the comments section below, and add its stock to the Fool's free portfolio tracker to see whether it can prove the naysayers wrong.

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 contributor Rich Duprey holds no position in any company mentioned. Check out hisholdings and a short bio The Motley Fool owns shares of Citigroup, JPMorgan Chase, Bank of America, Wells Fargo, and Dendreon and has created a covered strangle position in Wells Fargo. Motley Fool newsletter services have recommended buying shares of Wells Fargo. The Motley Fool has a disclosure policy. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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