7 Stocks Under Attack

Because 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, let's look at companies on the American Stock Exchange with the largest increase 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.

Shares short data courtesy of wsj.com. CAPS Rating courtesy of Motley Fool CAPS. Share counts in millions.
^Float is number of shares available for trading.

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 100,000-strong CAPS community just offers a good place to start. These investors seem to feel pretty good about some of these companies, because three have CAPS ratings of four stars or better.

Rigging it up
We've witnessed soaring prices for platinum's cousin palladium, watching as it rose to nearly $600 an ounce in March because of a power shortage in South Africa, where about 30% of the world's palladium is produced. Half of palladium's production is in Russia. Demand for the metal has not abated, fueled by the auto industry (where it's used in catalytic converters), jewelry makers, and investors, but prices have fallen since March and are now off roughly one-third from its peak.

While that has been good news for smaller producers such as North American Palladium, which supplies about 5% of the world's palladium, and for Stillwater Mining (NYSE: SWC), share prices have fallen in concert with the metal's decline. Yet it also seems that the setback might be temporary, because supplies have suffered a "shock" to the system with the South African situation. Analysts figure that while there will be a surplus this year, it will be significantly lower than the surpluses of the past two years, and prices probably will reverse course and begin to rise once again.

CAPS investor dbhealylongonly says he missed the first run-up in North American Palladium's price, but with it returning to more reasonable levels, he still sees great opportunities. "I missed the earlier run-up in the year, largely due to an industry adoption of the Blu-Ray standard (palladium is used in the manufacture of these discs), but am happy to see it coming back down to earth. Much like oil, this company is in an industry with limited supply and enormous demand-can't miss opportunity from where I stand."

Yet fellow CAPS player jempsall isn't so sure, questioning North American Palladium's inability to convert losses into profits even during periods of high prices. Here's an excerpt:

[It] has a less than stellar financial record based on my review of the last 3 years. They only achieved positive cash flow in mid-2006. Losses in 2006 were much less than 2005, but increased slightly in 2007. If these guys are [losing] money at these prices, what happens when prices go down? ... The good news is that average grade increased to 5.8 gm/t Pd vs 1.8 gm/t in the open pit. The bad news is that mining costs are much higher.

Speak up
You've heard from the CAPS community -- 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!