Do the Shorts Know Something You Don't?

Since everyone loves a winner, it's reasonable to assume that everyone hates a loser -- everyone but short sellers, at least. These contrarian investors bet that hot stocks are primed to fall, aiming to turn their pessimism into potential profits.

These top companies on the New York Stock Exchange with the largest percentage increases in shares short. Combining that with the collective intelligence of Motley Fool CAPS, we'll see which of these companies Fools believe have the power to make short work of short-sellers.

Sources: wsj.com. Share counts in millions.

Of course, this isn't a list of stocks to buy -- or short! These stocks could have serious problems that warrant their short interest, but they might also be stricken by short-term troubles. Only Foolish due diligence will tell you for certain; our 170,000-strong CAPS community offers just such a good place to start.

The short list
Rarely does putting together two failing businesses result in a better, stronger one. Sears Holdings (Nasdaq: SHLD) and Kmart should be proof enough of that concept. So investors shouldn't expect Rite Aid's decision to hook up with the SUPERVALU (NYSE: SVU) grocery store chain Save-a-Lot to produce a lot of green. Both the supermarket and the pharmacy have reported sliding sales, regardless of whatever success their joint marketing program may have had.

Last December, when I was suggesting Rite Aid was on line to see its last Christmas, I pointed out the much more successful Walgreen (NYSE: WAG) had already championed the concept of pushing more groceries. Where Rite Aid saw flat sales and a negligible 0.9% rise in comps in the latest quarter (along with a higher-than-expected loss), Walgreen saw a 9% jump in sales and a 4.1% rise in same-store sales while recording a profit that was almost 18% higher than a year ago. Those strong trends continued in March with higher sales and comps, though pharmacy comps did tick lower.

Of course, with such a surge in short selling as Rite Aid is being subjected to, there's always the possibility that any slightly positive news could foment a rout that turns into a short squeeze. But the longer-term health of the company remains a prescription for disaster for investors who ought to inoculate themselves against the stock.

CAPS member RallyCry thinks Rite-Aid's debt load weighs on it heavily, limiting its ability to turn its business around.

Rite Aid Corp is sporting a Long Term Debt to Cash ratio of 62 to 1 with negative earnings and cash flow for as far as the eye can see. How do they survive? Again 6.2 billion in long term debt versus 100 million in cash. Imagine the dilution that would need to take place at $1.11 per share to pay down the debt?

Give us a dose of your opinion on the Rite Aid CAPS page on whether groceries are the cure for what ails it.

No small thing
Do-it-yourself center Home Depot has done well for itself in spite of the terrible state of the housing market. That could very well be part of the reason behind the big gap up in short selling on the stock. Over the past six months the stock of the big orange warehouse is 25% higher. There's been a similar move higher by rival Lowe's (NYSE: LOW), and shares short have surged 70% there since late November.

Yet businesses can adapt to a changing landscape. As the Fool's Jim Royal points out, remodeling has become the new pastime, with the January Buildfax Remodeling Index rising 22% higher than the year-ago period and marking the 15th straight month of increases. You need a lot of lumber, paint, and wallpaper if you decide you're going to be living in your home for longer than you anticipated and need to fix it up. Remodeling has sustained paint specialist Sherwin-Williams through the recession and afterwards, too.

With nearly 4,200 CAPS members weighing in on Home Depot, more than three quarters believe it can still be the broad market indexes. Add it to your watchlist to see whether you can build something together.

Squeezed to death
With shares of RAIT Financial Trust already down more than 21% over the last quarter, short sellers might be expecting another financial calamity to sink shares further. The downgrade of U.S. debt by Standard & Poor's might have been expected to trigger a sell-off, yet the stock barely registered a move yesterday.

The weak housing market that some feel should continue weighing Home Depot down is actually helping the REIT's portfolio. Apartment living is now a more attractive financial option than owning a home, and two-thirds of RAIT's portfolio is in multi-family properties. That's precisely the reason Farrseer likes the REIT as an investment: "Invests in real estate, mostly multi-unit dwellings, which is where the growth for the next few years will be. Is profitable after a number of bad years. Will shine over the next few years."

While analysts are evenly split over whether it will outperform the markets, over 94% of the CAPS members rating the REIT think it can. Add the stock to the Fool's free portfolio tracker to find out who prevails.

Don't sell yourself short
It pays to start your own research on these stocks on Motley Fool CAPS. Read a company's financial reports, scrutinize key data and charts, and examine the comments your fellow investors have made all from a stock's CAPS page. Then share your views with the CAPS community: Squeeze 'em till it hurts, or short 'em till the sun don't shine? May the best argument prevail!