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 number of shares sold short and see whether traders are blowing smoke or if their worry has some merit.
Short Increase March 28 to April 15
Short Shares as a % of Float
Source: The Wall Street Journal.
On shaky ground? Highly unlikely!
I'll admit, when I saw Home Depot's name nearly at the top of the biggest short-interest increases for the previous two-week period, my jaw almost hit the floor. Sure, Home Depot has had an incredible run higher as housing prices have stabilized and the commercial side of the business has come roaring back, but the company was set to take advantage of both sides of the fence (personal and commercial) regardless of whether home prices stabilized.
Within the home improvement sector, you really only have two choices: Home Depot and Lowe's . In nearly every aspect, Home Depot has run circles around Lowe's. Home Depot has been taking advantage of technological improvements at its point-of-sale and has been utilizing its employees' skills to its advantage while Lowe's struggles under the added weight of sluggish appliance sales. Between the two, and including Home Depot's 2.1% yield, Home Depot is the clear winner.
A bet against Home Depot here would really be a bet that the commercial side of the business is about to slow dramatically. Consumers aren't likely to slow their remodels, as many still remain underwater and essentially "trapped" in their homes. Given historically low inventory levels in housing available for sale, and homebuilders' cautious approach to building, short-sellers appear to be playing with fire by betting against Home Depot.
Batteries not included
Most technology-based companies are prone to the ebb and flow of the technology cycle, and for a long time, that included lifecycle electronics servicer and wholesaler Ingram Micro. As cellphones evolved and tablets emerged, servicing and wholesale needs changed dramatically, and Ingram would see its share price swoon. Now, however, even with cellphone sales potentially showing their first signs of slowing, I feel Ingram could be ready to break out of the cyclical mold and crush the pessimists.
In Ingram's most recent quarter, reported last week, we saw worldwide sales jump by 19% to $10.3 billion. Of that, 13 percentage points came from the acquisitions of Brightpoint and Aptec Holdings, but we still saw a 6% boost in organic revenue. Emerging markets like Asia and Latin America delivered record revenue, with the North American markets also showing steady growth.
What really intrigues me with Ingram is the simple fact that global smartphone sales will be nearing 1 billion this year, according to Gartner, and tablet sales are taking off. Even if Ingram has to deal with the standard ebb and flow associated with the development of new technology, it'll have more than ample demand for ongoing lifecycle servicing. Seven times forward earnings isn't very much to pay for this sort of business certainty, and I feel short-sellers are making a poor choice by betting against Ingram here.
Can Barrick regain its shine?
Short-sellers who bet against Barrick at the end of March and have held on over the past month have certainly made some impressive gains as spot gold prices have retreated. Barrick, which has struggled over the past year under the weight of rising mining costs and weaker gold prices, wrote down the entire $3 billion value of a Zambian copper mine in February. The good news for long-term investors is that the outlook for the shiny yellow metal couldn't be brighter.
Two weeks ago, I detailed five reasons gold is a screaming buy right now. Highlighted in my research were the facts that global economies are still weak, the gold trend is still our friend, and low lending rates in the U.S. will spur non-CD and -bond investments. What we often also forget is that gold serves a purpose as an electrical conductor in electronics, so there are demonstrable ways to measure its usage.
Barrick is taking all the necessary steps to cut costs until gold prices bounce. It recently unveiled a plan to reduce its operating expenses by $500 million and may even halt its Pascua-Lama development until its cost structure improves. Ultimately, Barrick can turn to asset sales if it really wants to generate cash, and, as the largest producer of gold, it has more than enough non-core assets to raise cash as needed. With Barrick trading for just 84% of book value and at its lowest valuation in nine years, I feel short-sellers are making a poor choice if they're still holding here.
It doesn't often happen this way, but sometimes it just works out that all three companies we examine make short-sellers look a bit crazy. The long-term trends and value in each case make all three of these stocks a dangerous short-sale in my opinion.
What's your take on these three stocks? Do 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 recommends Gartner, Home Depot, and Lowe's. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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.
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