6 Stocks Under Attack

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

This week, let's look at companies on the American Stock Exchange with the biggest increase in short interest. We'll then consult the collective intelligence of Motley Fool CAPS to see which of these companies Fools believe have the power to make short work of short sellers.

Company

Shares Short, Jan. 31

Shares Short, Jan. 15

% Change

Total Shares Out

1-Year Return

CAPS Rating (out of 5)

General Moly (AMEX:GMO)

6.54

4.60

42%

57.0

236%

****

Eldorado Gold (AMEX:EGO)

5.02

4.40

14%

344.2

4%

****

Inverness Medical Innovations (AMEX:IMA)

7.77

7.41

5%

55.5

6%

*****

Gammon Gold (AMEX:GRS)

4.65

4.35

7%

117.4

(61%)

***

New Gold (AMEX:NGD)

3.24

2.96

10%

37.0

(28%)

**

Javelin Pharmaceuticals (AMEX:JAV)

3.81

3.62

5%

48.8

(30%)

***

Shares-short data courtesy of wsj.com. CAPS rating courtesy of Motley Fool CAPS. Share counts in millions.

Of course, this isn't a list of stocks to buy -- or to 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 83,000-strong CAPS community just offers a good place to start.

Our CAPS players seem to like most of these companies, if we go by the star ratings. And holy moly, has General Moly done well! Even if its shares have fallen back a little from their highs, it shouldn't be too surprising that the General tops the list of stocks for which short sellers have established large positions.

What a pain
It seems an odd time for short sellers to begin their attack on Javelin, however. Up until December, the pain-management company had simply been a development-stage pharmaceutical with no product revenues. With three drugs in late-stage trials, all of its revenues came from grants and reimbursements for expenses from the Department of Defense. In fact, it reported that as of the end of 2006, it had no additional funds available for reimbursement.

Yet that situation might change. In mid-December, the United Kingdom's health service issued pricing regulations for Javelin's top pain-management drug, Dyloject. That means Javelin can now start selling it to hospitals. Sales will undoubtedly be sparse to start, but the company will at least begin to generate revenues from products rather than relying on the kindness of government grants for its largesse. Analysts covering the company think it can produce some $9 million in revenues this year.

Over on CAPS, investors think Javelin has the potential to be a performance star. Of those rating the pharmaceutical company, 92% think it will outperform the market. CAPS player longtermGAARPer, though acknowledging that profitability hasn't arrived, thinks the company's therapies hold good potential:

Drug pipeline is very promising and it looks like one of them will be getting the green light in US and Europe soon. US military is interested and has funded Jav for [its] nasal injection pain med delivery system. Insiders are buying at around $4.

Top-rated All-Star ltmm found Javelin last August while looking at Wall Street stars on CAPS and discovered that even if the short term doesn't prove fruitful, the longer-term potential looks good:

The thing that made me rate this stock outperform and actually add a tiny amount to my real portfolio is the imminent pending news on Dylolect. Dylolect is an injectable version of diclofenac (a prescription anti-inflammatory drug), which so far has been poorly soluble and for which Javelin claims to have developed a soluble injectable version. It is in the last phase III study in the US and is about to be launched in the UK. The pre-approval inspection of the manufacturing facility was carried out in August and the final decision should come out by the end of September.

And so, while this is a guessing game as with any other biotech, I am hoping that JAV will jump nicely in the next two weeks or so. But even if it suffers a temporary setback with the UK facility, there is more potential upside in the six months ahead.

Speak up
You've heard from CAPS investors -- now it's your turn to have your say. 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!


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