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 potential profits.

These top companies on the Nasdaq 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 Oct. 29

Shares Short Oct. 15

% Change

%  Float

CAPS Rating (out of 5)

Genzyme (Nasdaq: GENZ  )

21.3

7.5

183.8%

8.4

****

Qiao Xing Universal Resources (Nasdaq: XING  )

1.8

1.1

63.6%

4.0

****

Banner (Nasdaq: BANR  )

1.0

0.7

39.4%

0.9%

**

Sources: wsj.com. Share counts in millions.

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
If the bid by sanofi-aventis (NYSE: SNY  ) to buy Genzyme for $69 a share falls through, then the short-sellers may have a point, but there seem to be plenty of potential bidders still out there that it's likely they've backed the wrong outcome.

Despite Sanofi and Genzyme engaging in a tit-for-tat spat over the true value of the biotech, the latter's not completely opposed to a takeover by the pharmaceutical. A higher valuation based on its turnaround efforts and the potential success of its multiple sclerosis therapy Campath could sway management to accept a higher bid.

If that doesn't pan out, then Pfizer (NYSE: PFE  ) or Johnson & Johnson (NYSE: JNJ  ) might be persuaded to make an offer. Genzyme has already reached out to Takeda. While the Japanese pharmaceutical giant supposedly has decided against it, there's little secret that acquisitions will fuel a lot of pharma growth in Japan. Drugs going off-patent will peak next year, and Takeda has set up a division to handle such opportunities.

With 95% of the CAPS members rating Genzyme to outperform the market, it seems they believe there's still value in the stock. Let us know on the Genzyme CAPS page whether the short-sellers are a day late and a dollar short with their bet.

Squeezed to death
While not short Qiao Xing Universal Resources, I have marked the company to underperform on Motley Fool CAPS, even if it makes good on its attempt to by Qiao Xing Mobile (NYSE: QXM  ) and strip it of the cash it has on the balance sheet. Short-sellers might not be betting against this governance-challenged company, but rather trying to profit from arbitrage.

Since Universal Resources owns 60% of the mobile subsidiary, there's little doubt the deal will go through, so if you short the former while going long the latter, you can make money virtually regardless of what happens (except if the takeover doesn't happen, which doesn't seem likely at this point). The arbitrage value continues to shrink, though, as time goes on.

Whether CAPS members are playing arbitrageur is hard to say, but more than 94% of them think Qiao Xing Universal Resources will outperform the market. CAPS member tferreira there's even sense to be made from a business standpoint to back Qiao Xing Universal:

Some "fools" criticize that the company left the wireless to go to mining, and they may not have a good experience in running such business as they did wireless. Quite the opposite, [Qiao Xing Universal] was mainly a mining business 10 years ago. Most of the chairman family has run the mining business for many years. Indeed the top management area of expertise is in mining. Going forward [Qiao Xing Universal] will be more predictable and consistent in delivering EPS.

You can bank on it
The CAPS community had been warming up to regional banking chain Banner, even as it saw wider losses this quarter. With loan losses rising and having to write down the value of more real estate, Banner's performance has taken a hit, and after a brief respite, investor confidence has fallen with it.

Maybe the shorts aren't so far off, here. We've noted several times how banks are using loan loss reserves to massage earnings, and now the congressional oversight panel monitoring the TARP bailout program says that, in the wake of the so-called "robo-signing" scandal, banks should undergo new stress tests. The committee points out that Bank of America (NYSE: BAC  ) alone could be forced to absorb losses on almost $50 billion in bad loans.

If banks have been reducing their loan loss reserves and engaging in pretend-and-extend practices, then maybe the facade of stability will crumble. Banner, at least, increased its provision by $2 million from the March to June quarters, raising it to $16 million, and it raised it again in the latest quarter to $20 million. Of course, that also points to a worsening situation in its portfolio.

CAPS member bullwheelrider still thinks Banner's value is such that it's too hard to ignore as an investment:

Not a takeout candidate in a geography littered with "undervalued" regional banks and FDIC assisted deals, but the price/TBV makes this stock too compelling for the long-term investor.

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!

Pfizer is a Motley Fool Inside Value selection. Johnson & Johnson is a Motley Fool Income Investor recommendation. Motley Fool Options has recommended a diagonal call position on Johnson & Johnson. The Fool owns shares of Bank of America and Johnson & Johnson. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. 

Fool contributor Rich Duprey does not have a financial position in any of the stocks mention in this article. You can see his holdings here. The Motley Fool has a disclosure policy.


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