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, let's look at companies on the American Stock Exchange with the largest decrease in the number of shares short. Combining that with the collective intelligence of Motley Fool CAPS, we'll see which of these firms Fools believe have the power to continue to make short work of short sellers.

Company

Shares Short, May 15

Shares Short, Apr 30

% Change

Float*

% of Float

CAPS Rating (out of 5)

SPDRs (AMEX: SPY  )

321.7

332.7

(3.30%)

537.2

59.89%

NR

Golden Star Resources (AMEX: GSS  )

4.4

11.6

(62.30%)

234.1

1.87%

****

On2 Technologies (AMEX: ONT  )

13.1

15.9

(17.21%)

152.8

8.59%

***

U.S. Gold (AMEX: UXG  )

3.6

4.6

(21.51%)

58.1

6.21%

****

BPZ Resources (AMEX: BZP  )

5.9

6.7

(12.45%)

60.5

9.76%

****

Telkonet (AMEX: TKO  )

4.9

5.6

(12.53%)

69.8

7.00%

*

Questcor Pharmaceuticals (Nasdaq: QCOR  ) **

3.4

4.1

(15.06%)

64.4

5.35%

***

Shares short and float data courtesy of wsj.com. CAPS Rating courtesy of Motley Fool CAPS. Share counts in millions. NR = not rated.

*Shares outstanding, minus shares controlled by insiders, restricted stock and shares held by 5% owners. For SPY, this number is the shares outstanding.

**Questcor delisted from the American Stock Exchange and was listed on the Nasdaq on 5/16/08.

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 105,000-strong CAPS community just offers a good place to start. Yet investors seem to like most of these companies, as evidenced by most having four-star CAPS ratings.

There were a few anomalies in this week's list. Questor moved to the Nasdaq exchange the day after the list was published, and the SPDRs, while having the largest decline in the number of shares short, are still the security with the largest number of shares short on the American Stock Exchange.

Short-circuited
Over the past few months, Golden Star Resources -- which operates extensively in Ghana, West Africa -- has been a company in transition. It replaced much of its top management, naming a new president and CEO, as well as a new executive vice president and COO. Also, although gold prices have been at record levels and the company is selling gold for more than 40% above last year's prices (not to mention that revenue from gold sold has risen 78% year over year), Golden Star still recorded a larger loss this past quarter than a year ago.

Part of the reason for the greater loss was the expenses associated with its new sulfide plant, which is expected to increase its production capabilities while eventually lowering its costs. At elevated price levels, extracting gold from sulfide rock becomes more economically feasible, and Golden Star says results from shallow transition ores are consistent with expectations; the company anticipates greater amounts of gold ore as it digs deeper.

Still, the plant has had mechanical issues and might remain a troublesome proposition. Investors like CAPS player JohnnyMojo recognize this, but also see the potential for a better operating company, one with takeover potential:

Looking for a takeover candidate? Look no further then GSS. On the path to become a half million ounce a year producer by the end of 2008, a ma[r]ket cap around a billion, a new CEO who actually knows what he is doing, and a history of being the leader in ... constantly beaten-down, options-players-manipulated stock, when they finally begin to execute on full scale with their biox plant, one of two of this size in the world for extracting gold from highly oxidized ore not normally salvageable.... They will be bought immediately.

Investors like mancini think the new plant makes Golden Star a much more reasonable investment, since it is still a feasible operation, even at significantly lower price points for gold:

Valuations have been pushed down, thanks to delays on getting the full BIOX system up and running. That is complete, power is online, new management is in place, and gold is close to $900 for an operation that should be profitable for gold as low as $600. Price was further suppressed by recent downgrades... First good report about production or earnings should generate a 20% pop.

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!

Try any of our Foolish newsletters today, free for 30 days.

Fool contributor Rich Duprey does not have a financial position in any of the stocks mentioned in this article. You can see his holdings here. There's no shortcut around the Motley Fool's disclosure policy.


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