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 of stocks that lose money over the long haul. According to hedge fund institution Blackstar Funds, even with dividends included, between 1983 and 2006, 64% (nearly two-thirds) of stocks underperformed the Russell 3000, a broad-scope market index.
A large influx of short-sellers shouldn't be a damning 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 take a look at three companies that have seen a rapid increase in the amount of shares currently sold short and see if traders are blowing smoke or if their worry could have some merit.
Short Percentage Increase, Sept. 30 to Oct. 14
Short Shares as a Percentage of Float
Superior Energy Services (NYS: SPN)
Eastman Chemical (NYS: EMN)
Monsanto (NYS: MON)
Source: The Wall Street Journal
Guilty by association?
Investors have creamed shares of Superior Energy Services over the past two months. Macroeconomic worries concerning a global slowdown have been a drag, but the recent driving force behind the pessimism appears to be the company's purchase of Complete Production Services (NYS: CPX) for a hefty premium of 61% based on the closing prices the day the deal was announced.
But, as fellow Fool Matt Koppenheffer pointed out, the deal values Complete at six times its trailing 12-month EBITDA, which is more or less in line with the company's historical average. In addition, since the deal, Superior Energy reported a better-than-expected profit on a 30% jump in revenue. As oil prices have rebounded over the past couple of weeks, the implied demand for Superior's underwater well services only increases. The shorts could be facing a blowout here if they aren't careful.
Eastman Chemical, manufacturer of plastics for beverage containers, chemicals for LCD displays, and fibers for cigarettes, has really drawn the ire of shorts the past two weeks -- and possibly for good reason.
Based on the company's third-quarter earnings report, revenue is growing at a steady rate (20%), but earnings remain under pressure. A slowdown in LCD volume coupled with a rise in raw materials and energy costs could put a dent in Eastman's bottom line. The company does pay out a decent dividend at 2.5%, but sector behemoth Dow Chemical (NYS: DOW) recently reported a significantly stronger outlook and is actually offering shareholders a higher dividend yield than Eastman (3.4% versus 2.5%). Weakness in the company's specialty plastics division isn't enough to make Eastman a sell in my books, but it's clearly enough to get the attention of short-sellers.
A seed for your thoughts
Short-sellers of Monsanto, best known for its pesticide Roundup and its genetically altered seeds designed to protect farmers from the damaging effects of bugs, added nearly 4 million shares in the first half of October, but should investors be concerned? Probably not.
It would be one thing if growth were slowing at Monsanto, but the company continues to stick with its long-term growth rate in the mid-teens. To add to that, farmers are coming off one of the strongest crop seasons in recent history, with prices surging and crop yields high. This leaves plenty of extra capital left over to spend on Monsanto's products. Although not cheap at 19 times forward earnings, Monsanto offers a stable 1.6% dividend yield and $2.8 billion in cash. These figures could have short-sellers climbing the wrong beanstalk.
Long-term growth rates are an important factor when considering an investment. While I'm not saying to ignore the present, investing is all about looking forward, and based on that, it appears that only Eastman Chemical might be in for a bumpy ride.
What's your take on these three stocks? Do the short-sellers have their number or are they all wet? Share your thoughts in the comments section below and consider adding Superior Energy Services, Eastman Chemical, and Monsanto to your free and personalized watchlist to keep up on the latest news with each stock.
At the time this article was published 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 and on Twitter where he goes by the handle @TMFUltraLong. Motley Fool newsletter services have recommended creating a synthetic long position in Monsanto. 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 that never needs to be sold short.
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