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 Oct. 15 to Oct. 31
Short Shares as a % of Float
Stillwater Mining (NYS: SWC)
HCA Holdings (NYS: HCA)
Freescale Semiconductor (NYS: FSL)
Precious metal or fool's gold?
There was a time not too long ago when the rising costs of labor, fuel, and mine maintenance only seriously affected a handful of miners. Now, rising costs are a major concern for metal miners both big and small.
Stillwater, a platinum and palladium miner, has been dealt the double whammy of dealing with rising labor and benefits costs, since it's hiring more workers, as well as with falling prices for both platinum and palladium. According to Stillwater's third-quarter results, the average realized price of platinum group metals (PGM) sold was 18.7% lower than in the previous year, while production of PGMs dipped 2.3% despite the increased workforce.
I'm not ready to concede that short-sellers could be on to something by betting against Stillwater; however, there are two factors that give even more merit to their case. For one, Stillwater is valued at 20 times forward earnings -- a significant premium to many of its mining peers. Second, and most important, a good chunk of PGM sales go to the automotive industry. October's auto sales figures for General Motors (NYS: GM) and Ford (NYS: F) did demonstrate positive unit growth, but at a much slower pace than in previous months. If auto sales continue to taper off, so will demand for platinum and palladium -- that's bad news for Stillwater. My suggestion: Keep a close eye on auto sales, as they will tell the tale of PGM demand in the coming year.
Four more years
As I extolled previously, no sector had more to lose with regard to the U.S. election than the hospital sector.
With the passing of the Affordable Care Act, individual insurance mandates will soon require that people carry health insurance, whether it's paid out of their own pocket or by the upcoming expansion of the government-run Medicaid system. Hospital operators like HCA have been hurt for years by patients who receive care and are unable to pay their bill. Assuming the ACA goes into effect in 2014, hospital operators like HCA will slowly see these bad-loss provisions drop off their books and they'll be able to keep a greater portion of their profits for acquisitions or perhaps even dividends.
The presidential election this past week that saw incumbent Barack Obama retain his position for a second term solidifies the notion that the ACA will go into effect in full by 2014, and positions HCA for strong performance over the long term. Short-sellers may want to reevaluate their positions.
Chips and dips
Having hit the next downturn in the chip sector, short-sellers have taken a liking to Freescale Semiconductor, a provider of chips to the automotive and industrial sector. But is this pessimism warranted? I'd have to say it just might be.
For its recently ended third quarter, Freescale reported a surprise profit of $0.04; however, revenue declined by 11% over the year-ago quarter. Furthermore, Freescale is expecting a high single-digit decline in sequential revenue in its upcoming quarter, as well as a 300-basis-point decline in gross margin. Freescale is planning to counter its recent demand declines by restructuring its operations and focusing its research and development in specific areas.
It'd be unfair not to point out that most of the semiconductor sector is suffering due to a decline in global demand, but it'd also be wrong not to mention that Freescale's $6.5 billion in debt puts it at a distinct disadvantage to many of its peers. Much like Stillwater Mining, which is dependent on auto sales, Freescale is going to live and die by auto sales and the overall health of the global economy. At the moment, neither looks too promising.
This week's theme is all about looking beyond the surface. All three companies present viable reasons to be pessimistic, but only Freescale presents a reasonable case for investors to be worried about an extended downturn.
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 Ford. Motley Fool newsletter services have recommended creating a synthetic long position in Ford. 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.