10 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 bet that hot stocks are primed to fall and aim to turn their pessimism into potential profits.

This week, let's look at companies on the Nasdaq with shares sold short which represent the largest percentage of a company's float. 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.

Source: wsj.com. Share counts in millions. *Shares outstanding, minus shares controlled by insiders, restricted stock, and shares held by 5% owners.

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 115,000-strong CAPS community just offers a good place to start. We do note, however, that three of the stocks have shares short that exceed their float, though only two of them -- Conn's and Cal-Maine -- show up on the SEC's Regulation SHO list.

Eggs-actly what you're looking for
Investors are clucking that Cal-Maine Foods, the country's largest egg producer, has seen its shares nearly triple in value this year alone, and the stock is up over 600% since 2006. Languishing after fad diets like Atkins had petered out, the stock looked poised for a rise, as some smart Foolish analysts pointed out at the time.

Today, though, feed prices are soaring. Yet it would be a mistake to think that Cal-Maine might not be able to go higher still. The company is in an eggs-ellent position to pass along its higher costs to consumers, with net debt at a miniscule $2.3 million, and it is becoming more acquisitive, having just recently completed the buyout of Zephyr Egg. More such mergers may be on the way, and with its shares short so high, it might also be primed to benefit -- in the short term, anyway -- from a short squeeze.

CAPS member mitleg not only thinks the growth story is intact for Cal-Maine, but that it has the fundamentals on its side as well:

This company has been a great growth story. They have low debt, a favorable pe and peg ratio, and excellent growth in net earnings and revenue both. It also has significant insider ownership which is good to see. The last thing I like to see is that they are in an industry with significant barriers to entry. It is also an industry with few people banging on the door to get into.

Fueling up or running out of gas
Air pollution control systems expert Fuel-Tech recently reported second-quarter profits that jumped 59% for the year on a 16% increase in revenue. The results, however, still fell short of analyst expectations. Regardless, the company says it fully expects to convert its backlog into revenue while getting additional growth from its fuel treatment division.

Yet as my Foolish colleague William Trent noted earlier this year, with Fuel-Tech using a percentage-of-completion method to recognize sales, there are plenty of guesstimates the company is using to determine how much money it will recognize in any particular quarter. By being aggressive in its estimates, it can ensure that revenue that should be realized later may be recognized early.

One way to judge this is by looking for a big spike in unbilled receivables. Fuel-Tech's unbilled receivables more than quadrupled during 2007, but they've fallen back sharply in 2008, from $16.8 million to $10.6 million. Similarly, although total receivables were up 67% year-over-year in the second quarter -- a red flag for investors -- they're actually down about 20% from two quarters ago.

With demand for coal continuing unabated, it's hard to find an argument against Fuel-Tech's technology. CAPS member SARdMc, for example, notes that as long as countries are burning coal, there will be a need to clean up:

Sales are growing in the U.S. and the company is just starting to break into the China market (heaven knows they certainly need to clean up their air). A lot of people think this stock will only do well if our government forces the utilities to stricter emission standards but studies are showing that the product actually makes the utility more efficient and increases their margins. There appears to be a growing sentiment for utilities to use these products not because they have to, but because it is good for them to use them. A win-win.

Speak up
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!