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 tend to trend upward 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 for any company, but it could be a red flag indicating that something is off. 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 Oct. 15 to Oct. 31
Short Shares as a % of Float
Is this a gorilla or a banana peel?
It feels like investors have been waiting an eternity to see Corning explode higher, and they finally got their wish last month after the conglomerate announced a deal to purchase Samsung's 43% stake in Samsung Corning Precision Materials. This deal is important because the joint venture is responsible for making Corning's glass substrates, including the highly touted Gorilla Glass used in various mobile devices.
The question really is whether Corning can translate its 100% ownership in this glass substrate business into big gains or whether the stock has come too far, too fast.
I'm fully in the optimists' camp when it comes to Corning. First, Corning's business is well diversified, with long-term potential in its life sciences and environmental technologies segments that gives it the ability to survive weakness in other segments or the cyclicality of its tech business. Second, Gorilla Glass really is that important. It's becoming the standard choice in mobile devices, and Corning is about to recognize the product's full revenue potential. Finally, Corning's cash flow is really impressive, even if its top- and bottom-line growth has been lacking of late. Over the past four years, Corning has generated nearly $6.2 billion in free cash flow, which allots the company ample cash to invest in research and development and to pay out what is currently a healthy 2.3% yield.
Corning will most certainly not be without its cyclical hiccups, but at 11 times forward earnings, and with catalysts now visible, I wouldn't suggest betting against this company.
Keep on truckin'
It was a bold call at the end of last year, but my bet on the trucking industry seeing a huge rebound in 2013 has come true, especially for Swift Transportation.
But, as you can tell by the huge short interest built against Swift (nearly 43% of its float), not everyone is on board. There are numerous headwinds working against the trucking industry, including higher fuel costs, much stricter driving hours for drivers, and higher maintenance and labor expenses for America's aging tractor-trailer fleets. Not to mention that the trucking industry requires a strong consumer-driven economy to spur demand, and U.S. GDP growth hasn't exactly been phenomenal.
Thankfully for shareholders, the road looks clear for Swift shares to continue their charge higher. Although Swift isn't facing ideal conditions with regards to costs or truck maintenance, it's done a fantastic job of mitigating expenses and improving operating ratio, which is really all that matters. In the third quarter, Swift's operating ratio dipped 40 basis points from the prior year on the heels of improved carload efficiency and what I suspect is strong pricing power. In addition, Swift saw notable gains from its highly competitive intermodal segment, where its operating ratio improved 510 basis points to 97.8%.
Even after its huge run-up, Swift at 16 times forward earnings isn't particularly pricey -- and it may even be primed to deliver a short squeeze if pessimists aren't careful.
Not looking so Sharpie
Last but not least this week we have Newell Rubbermaid, a consumer goods giant known for everything from its plastic storage products to Sharpie pens.
It was a bit odd on the surface to see such a large increase in the number of shares held short by pessimists of a company with such a powerful household brand. Digging into its most recent earnings report, though, I can somewhat see what those pessimists are latching on to.
In the third quarter, Newell Rubbermaid reported a whopping 78% increase in net income, which handily surpassed Wall Street's estimates but was buoyed almost entirely by the sale of its hardware business. Beyond these one-time gains, revenue grew by a paltry $30 million year over year to $1.49 billion as Newell Rubbermaid relied on cost-cutting and share buybacks to drive growth. In fact, Newell Rubbermaid announced an accelerated share repurchase agreement of $350 million at the end of last month. Although share buybacks do help boost earnings per share by lowering the number of shares outstanding, they're masking a lack of organic growth at this company.
Don't get me wrong; There are a number of positives from Newell's report, including stronger growth in Latin American markets and consistent cash flow. But even at just 15 times forward earnings, the lack of organic growth is a bit concerning. While I wouldn't lump myself in with the short-sellers here, I would suggest that their pessimism could be warranted.
This week's theme is all about organic versus manufactured growth. In the case of Corning and Swift, we have two companies that are bringing new products to market, and which are wheeling and dealing to bring new revenue growth opportunities into view. Newell Rubbermaid, meanwhile, is hiding a lack of growth behind stiff cost-cutting, unfavorable currency translations, and share buybacks.
One growth stock investors would be wise to avoid
If an apple a day can keep the doctor away, then perhaps this incredible tech stock, which is growing twice as fast as Google and Facebook, and more than three times as fast as Amazon.com and Apple, can keep the short-sellers at bay. Watch our jaw-dropping investor alert video today to find out why The Motley Fool's chief technology officer is putting $117,238 of his own money on the table, and why he's so confident this company will be a huge winner in 2013 and beyond. Just click here to watch!
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, and recommends Corning. 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.