Beating Back the Short 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 bet that hot stocks are primed to fall, aiming to turn their pessimism into potential profits.

This week, we're looking at companies on the American Stock Exchange with the biggest decline in the number of 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.

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 89,000-strong CAPS community offers a good place to start. Most of these companies are generally well-liked, as most have garnered three CAPS stars or better.

Feeling the squeeze
Perhaps the first thing you would notice is that while we're looking at stocks that have seen the largest decrease in their shares short, five of the seven companies have actually seen their shares-short count rise! Why, for example, would Golden Star see the shorts pile in on its stock despite an increase in share price that would seemingly position it for a short squeeze?

Short-sellers may have been emboldened by the fourth-quarter report issued at the end of last month, which underscored the company's January announcement that while the Wassa mine produced yet another record achievement, the Bogoso mine promised a less-than-stellar return. Management's lowering of guidance for the next year would seemingly belie the rosier expectations it has put out for the mine.

Yet they probably did not anticipate the collapse at Bear Stearns last week that precipitated a spike in gold prices to more than $1,020 an ounce just 10 days ago. While the Fed's recent actions have caused an equally dramatic plunge in gold prices to $920 an ounce, they also have some analysts predicting the peak of the commodities bubble.

Investors seem to recognize the possibility that riding the golden rails may soon be coming to an end, but CAPS investor goofypicker recently asked if anything has really changed in the market? The answer in the pitch is no, but goofypicker predicts continued volatility.

Many speculators are [panicking] and claiming that this is the end of the "commodity bubble". I don't think so. ... The Fed continues to pump liquidity into the market, the interest rate continues to decline, inflation continues to increase and the dollar continues to fall. ... Precious metals will experience quite a bit of volatility and the gyrations may be tough to handle but I think due to the fundamentals ... that a year from now precious metals will be much higher.

Earlier this month, CAPS All-Star Gedunken found a more fundamental reason to think Golden Star will outperform the market. He cited new management and better operations at its mines as reasons to remain hopeful.

This company has been hurt by poor management and failures to meet quotas as well as a basic dislike from the goldbugs because of some of its business practices. But with new leadership at the helm and the mine now operating at quota, the [company's] fundamentals should be turning around. Coupled with the recent rapid increases in gold prices, a small mining company like this will benefit significantly, although usually a bit later than the big miners which have already begun their moves up.

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