Do the Shorts Know Something You Don't?

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 profits.

These top companies on the American Stock Exchange had the largest percentage increase in shares sold 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.

Company

Shares Short
Sept. 30

Shares Short
Sept. 15

Change

 Float

CAPS Rating
(out of 5)

L&L Energy (Nasdaq: LLEN  ) 3.0 1.9 59.5% 15.8% ****
American Capital Agency (Nasdaq: AGNC  ) 4.0 2.7 48.7% 8.3% ***
Gulf Resources (Nasdaq: GFRE  ) 2.4 1.7 42.0% 12.5% ****

Sources: wsj.com. Share counts in millions. NM = not meaningful.

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 170,000-strong CAPS community offers just such a good place to start.

The short list
Distance apparently does make the heart grow fonder. Seattle-based coal company L&L Energy has all its operations located in China. Given that country's voracious coal appetite, it would seem to have a desirable business. After all, Yanzhou Coal Mining (NYSE: YZC  ) surged yesterday on third-quarter earnings as the price of coal in China jumped 28% and Peabody Energy (NYSE: BTU  ) is banking on the industry being in the midst of a huge supercycle.

You can't find better demographics, according to CAPS member adhamhurani, who says L&L Energy is poised to reap a windfall as a result:

Coal , Coal , Coal ... china thurst for energy getting bigger in daily bases , the people of china republic is earning more and more money which in turn they spend on buying energy consuming basic and luxury products , china electricity production relies majorly on coal power plants , L&L looks to be promising company wishing to be important coal supplier

Only you can know whether this type of investment is suited for your portfolio, but you can add L&L to your My Watchlist page and have all the Foolish news and analysis about it aggregated for you in one place.

Its business is business
Investors in American Capital Agency are getting the full faith and credit of the U.S. taxpayer when they invest alongside the mortgage real estate investment trust (REIT). Externally managed by private equity firm American Capital  (Nasdaq: ACAS  ) , American Capital Agency is a REIT whose investments in pass-through securities and collateralized mortgage obligations have their principal and interest guaranteed by government agencies like Ginnie Mae, Fannie Mae, and Freddie Mac.

While the public's faith in the government's credit may be at its nadir, with a yield north of 20%, American Capital Agency is a REIT investors are having little trouble endorsing. Since it is releasing earnings today after the market's close, CAPS member aronbert  believes it will generate even more interest very soon:

As REITs continue to outperform the average stock I feel that we are going to see a REIT such as AGNC attract more than enough attention with the healthy return that we will see even more growth in a short period of time.

Squeezed to death
When the new short interest numbers are released, we're likely to see that the short-sellers have abandoned Chinese bromine manufacturer Gulf Resources. Shares fell 30% throughout September, but have since been marching north, rising 33% in October.

With strong demand at home and international peers like Albemarle (NYSE: ALB  ) and TETRA Technology finding new strength globally, Gulf Resources is bound to make short work of the short interest.

CAPS member MarketMage thinks management's interests are aligned with outside shareholders. Let us know what you think on the Gulf Resources CAPS page.

Don't sell yourself short
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!

Try any of our Foolish newsletter services free for 30 days. True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community.

Fool contributor Rich Duprey currently does not own any stocks as you can see here. The Motley Fool has a disclosure policy.


Read/Post Comments (4) | Recommend This Article (10)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 27, 2010, at 3:41 AM, tomshauklas wrote:

    I'm trying to figure out why Motley has a mission to slam AGNC. This is the 6th article in two weeks slamming them and Bloomberg just reported that AGNC is one of the top 50 stocks that had a decrease in short positions in the month of October.

  • Report this Comment On October 27, 2010, at 7:09 AM, DR1P wrote:

    Hey Rich, When did you originally write this... about three weeks ago? Back then you would’ve had a point, but now parts of the article are dated and, basically, inaccurate. One thing I don’t understand… and MF isn’t the only guilty one… is why so many articles are re-released with a new date on it as though they are new articles.

    Either this is an (insufficiently) edited old article, or you just need to use the correct (as in not outdated) data and make the wording match the data. Obviously it wasn’t all written when the short data in the box was significant (about 2-3 weeks ago), due to the line “Since it is releasing earnings today after the market's close…” being included. If you would replace the outdated data with the current data (mentioned above by tomshauklas) and replace “increase” in the first line of the second paragraph with “change” it would be correct… at least as far as AGNC is concerned. I didn’t read the rest of the article since I wasn’t concerned with the other stocks.

  • Report this Comment On November 01, 2010, at 9:52 AM, woo131 wrote:

    Shorting AGNC has everything to do with its huge dividend and the cyclic nature of the stock price at the Ex-dividend date, and very little to do with the quality of the company. Many traders have a complicated long-short put-call strategy that they feel earns more money than just holding and collecting the dividend. Right or wrong, they prefer the trading to the holding.

  • Report this Comment On November 08, 2010, at 2:03 PM, ravens9111 wrote:

    I would be wary of this stock only because of the auditor.

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