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% of stocks -- nearly two-thirds -- 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 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 if their worry has some merit.
Short Percentage Increase March 30 to April 13
Short Shares as a Percentage of Float
|Newell Rubbermaid (NYS: NWL)||71.9%||1.9%|
|Beazer Homes (NYS: BZH)||56.1%||12.8%|
|France Telecom (NYS: FTE)||80%||0.3%|
Sources: The Wall Street Journal and Yahoo! Finance.
Circle this with your Sharpie
Short-sellers who expected Newell Rubbermaid's earnings results to be under inflationary and raw-material price pressure may want to cancel their celebratory plans.
After watching numerous companies get away with blaming rising input costs, Newell Rubbermaid did no such thing, reporting 5.2% core sales growth and a 14% increase in normalized EPS. Newell, which markets a wide array of consumer and commercial products, noted that a mix of higher prices, better operating efficiency, and a good product mix more than offset rising input prices. Most important, the company reaffirmed its full-year guidance of 3% to 6% EPS growth and $550 million to $600 million in operating cash flow. Those are results you can circle with Sharpie and take to the bank! Newell doesn't have the fastest-growing business, but I wouldn't dare bet against it.
At a "loss" for words
Might we be on the verge of a recovery in the housing sector? Initial indications from this quarters' round of earnings would indicate so, with D.R. Horton (NYS: DHI) reporting a 21% increase in revenue and a 17% increase in home orders closed over the past six months. So why isn't everyone getting all excited about Beazer Homes, then? I think it's because it's the bottom of the barrel in a terrible sector.
In its recently ended quarter, Beazer actually noted a 3.9% rise in the average selling price of its homes (my heart be still) as well as a 29% rise in new orders. That still didn't stop Beazer from widely missing Wall Street's expectations for a loss of $0.43 per share, clocking in with a $0.48 EPS loss. That's still smaller than its $0.73 per-share loss in the year-earlier period, but when are the losses ever going to end?
Beazer hasn't turned a profit since 2006 -- and according to analyst estimates on Yahoo! Finance, losses are predicted at least through 2013 -- and sales plummeted 83.7% between the peak in 2006 and its fiscal 2011 annual results. This is a company that short-sellers have every right to be skeptical about.
Weak by association?
Just because neighboring telecom provider Telefonica (NYS: TEF) reduced its dividend in order to conserve cash and is being outplayed on its home turf in Spain by France Telecom does not -- I repeat, does not -- make France Telecom weak by association.
France Telecom has quietly been putting up strong international results in light of a weak macroeconomic outlook. Its mobile arm, Orange, noted year-over-year mobile subscriber growth of 24.8% in sub-Saharan Africa in its latest quarterly report. But that's not all. France Telecom, as I mentioned, also managed to eke out 4.5% revenue growth in Spain, Telefonica's home turf. France Telecom also pays out a hefty semi-annual dividend that has topped double-digit yields in recent years. There's a reason it found a home in my series on great dividends you can buy right now, and why it found its way into the Fool's own Anand Chokkavelu's Rising Stars portfolio.
This week it's a reminder that "Anything you can do, I can do better" is actually a great stock mantra to live by. Beazer clearly can't do better than its peers, so it's proven historically to be a poor investment. France Telecom and Newell Rubbermaid have shown otherwise.
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, and consider using the links below to add these stocks to your free and personalized watchlist to keep up on the latest news with each company.
Also, if you'd like to avoid the potential pitfalls that high short interest can bring, I suggest you download a copy of our latest special report: "The Motley Fool's Top Stock for 2012." In it, our chief investment officer gives you the skinny on a company he has dubbed the "Costco of Latin America." Best of all, this report is completely free, but only for a limited time. Don't miss out!
At the time this article was published Fool contributor Sean Williams has no material interest in any companies mentioned in this article. He prefers ultra-fine-point Sharpies. 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 France Telecom. Motley Fool newsletter services have recommended buying shares of France Telecom. 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.
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