Shorts Are Piling Into These Stocks. Should You Be Worried?
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 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 underperformed the Russell 3000, a broad-scope market index.
A large influx of short-sellers shouldn't be a condemning 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 sold short and see whether traders are blowing smoke or whether their worry has some merit.
Short Increase Sept. 14 to Sept. 28
Short Shares as a % of Float
Iamgold (NYS: IAG)
Transocean (NYS: RIG)
MetroPCS Communications (NYS: PCS)
Follow the yellow brick road
I don't blame investors for being skeptical about the recent rally in Iamgold, since miners have vastly underperformed the actual spot price of gold for years. In addition to rising labor and fuel costs, miners have had to cope with exorbitantly high mine buildout and upkeep costs that have stopped some miners dead in their tracks. Kinross Gold (NYS: KGC) , for instance, completely wrote down the value of its Tasiast mine in Mauritania in the meantime as it assesses whether or not a mine buildout would even be worthwhile.
However, Iamgold hasn't shared these concerns to the same extent as its peers. In fact, as Foolish metals guru Christopher Barker recently noted, Iamgold appears on pace to deliver big gains to shareholders over the long run. Just two weeks ago the company reported a 274% increase in indicated resources at its Cote Gold mine, and as Christopher reminds investors, the company has a rich stockpile of rare-earth minerals in some of its mines. I'm not sure at 10 times forward earnings that I'd be brave enough to bet against Iamgold here, and would suggest short-sellers consider looking elsewhere.
This one could be a gusher
Thanks for nothing, Chevron (NYS: CVX) ! The nation's second-largest oil and gas company cautioned investors last week that earnings would come in substantially below last year's figures due to a combination of lower oil prices and production delays in Mississippi caused by Hurricane Isaac. While much of this is well beyond the control of Chevron, it cast a cloud over the entire oil sector, including offshore driller Transocean.
Transocean has dealt with countless problems since the tragic BP oil spill in 2010, including lawsuits and a secondary offering that has weighed on its share price. But there are also plenty of reasons to be optimistic about Transocean's offshore drilling future, as my Foolish colleague Travis Hoium recently touched on.
To begin with, oil isn't going anywhere anytime soon, and we have a whole lot of it in deepwater and ultra-deepwater regions of the Gulf of Mexico. With both U.S. presidential candidates agreeing that we need to lessen the U.S.'s dependence on foreign oil, it seems either administration is going to be in favor of further energy exploration in and around the United States. That bodes well for Transocean and the entire industry. When Transocean can finally put its legal woes behind it, it could be cleared for takeoff.
A buyer at last
Deutsche Telecom's T-Mobile agreed two weeks ago to purchase MetroPCS, the nation's No. 5 mobile provider, in a deal that had MetroPCS shareholders dancing in the streets. T-Mobile will pay MetroPCS shareholders $1.5 billion in cash and will issue stock, resulting in the nation's No. 4 carrier owning about 74% of the company. This is perhaps the best news in years for the struggling MetroPCS and its shareholders.
Until this deal was announced, MetroPCS had been burning through customers at an alarming rate. Its allure in the past had been its 2G and 3G networks, as well as its cheap pay-as-you-go phones, which brought in customers who didn't want to be tied to a pricey long-term mobile contract. However, as smartphones have become cheaper, and bigger networks like Verizon and AT&T have built out their 4G LTE and 3G networks well beyond MetroPCS', the company began to lose subscribers at an alarming rate.
For T-Mobile, other than gaining new customers, the big boost comes from the additional spectrum it will acquire. It remains to be seen how lucrative the synergies from the deal will be, but I anticipate quite a few hiccups with integrating MetroPCS' existing networks with that of T-Mobile. Call me crazy, but short-sellers may still have hope here.
This week's theme is all about past performance. Now you can read any brokerage website and be reminded that past performance is no guarantee of future results, but Iamgold and Transocean both have a strong history of growth, while MetroPCS has been on the decline for years -- and those are trends I'm comfortable will reemerge in due time.
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.
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The article Shorts Are Piling Into These Stocks. Should You Be Worried? originally appeared on Fool.com.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 Transocean. Motley Fool newsletter services have recommended buying shares of Chevron. 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.