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 if their worry has some merit.
Short Increase Oct. 15 to Oct. 31
Short Shares as a % of Float
Coca-Cola (NYS: KO)
AOL (NYS: AOL)
Bonanza Creek Energy (NAS: BCEI)
No monsters in this closet
A 20.6% rise in Coca-Cola's short interest normally isn't much to get worried about; but given the recent energy-drink woes suffered by Monster Beverage (NAS: MNST) which is under heavy FDA scrutiny after the safety of its energy line was put into question following the death of a 14-year old girl, Coke shareholders have to be at least slightly concerned... or do they?
Whereas Monster receives more than 90% of its revenue from its energy drinks, Coca-Cola has a myriad of global brands to pick up the slack elsewhere should legal or production problems arise. Coca-Cola does distribute Monster within the U.S., but, as I noted in April, it also has 15 of the 33 non-alcoholic beverages topping $1 billion in sales in its product portfolio. It's worth mentioning as well that health regulations are usually far less strict outside the U.S., so while energy-drink concerns exist domestically, the same is probably unlikely in emerging markets.
Coca-Cola is a dividend behemoth that pours out profits on a quarterly basis. Short-sellers have no business betting against this company.
You've got ... problems
Last year AOL's CEO Tim Armstrong wiggled his way into my 10 worst CEOs of the year list for his lack of vision and his inability to do right by shareholders. This year has been markedly different with AOL's stock nearly up threefold at one point, thanks in part to the sale of roughly 800 advertising and mobile patents to Microsoft (NAS: MSFT) in April for $1.1 billion. More than half of that cash is being used to increase shareholder value (i.e., share buybacks). But given the monstrous rally we've witnessed in AOL's share price, is a further jump warranted? I'd say probably not.
Although, as my Foolish colleague Brian Pacampara pointed out, AOL handily crushed Wall Street's estimates in the third quarter and raised its full-year operating income forecast, the longevity and sustainability of its ad-based expansion just doesn't appear sustainable. A weakening spending environment is what did in most ad-based Internet companies in the 2000s, and there's still plenty of execution risk as it transitions to an even more ad-centric revenue model. At 26 times forward earnings I have to think short-sellers are circling AOL like a vulture.
Going crazy, or crazy good?
If I gave out bonus points for great company names, Bonanza Creek Energy would be high on my list. But it takes more than a great name to impress investors -- and so far, this oil and gas exploration and production company is doing a marvelous job in southern Arkansas and the North Park region of the Rocky Mountains.
As a rapidly growing oil producer, Bonanza's third-quarter report caught many investors sleeping. This report highlighted revenue growth of 118% to $59.6 million, production growth of 117% (including a 140% spike in crude oil production), and a hefty 527% increase in net income to $0.37 per share -- yet somehow that missed Wall Street's EPS projections by $0.01.
Still, almost everything appears to be working in Bonanza's favor. Natural gas prices have stabilized, which should boost its profit potential in upcoming quarters. Also, recent wells drilled in Niobrara have shown favorable results with production capabilities increasing. Finally, the Bonanza has been able to successfully negotiate more land leases. With Bonanza more reliant on oil than gas, and oil prices much less volatile that natural gas prices, I'd say short-sellers may be barking up the wrong tree, or down the wrong well, with this stock.
This week's theme is all about what your product portfolio looks like. Even though Coca-Cola is a gigantic global brand, and Bonanza Creek is a small-cap oil & gas company, they both have diverse portfolios that don't make betting against them a smart move. AOL, on the other hand, hasn't shown that it'll be able to adequately grow if economic growth worsens.
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 Microsoft. Motley Fool newsletter services have recommended buying shares of Coca-Cola and Monster Beverage, as well as creating a synthetic covered call position in Microsoft. 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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