Global Slowdown: 7 Emerging Market Stocks Being Targeted by Shorts

It wasn't so long ago that emerging markets were drumming up all sorts of excitement on Wall Street. Growth in developing countries like China was to be a boon not just for U.S. investors, but the global economy at large as well. Hopes were high that the nations of the world would collectively prosper, by keeping the terms of global trade amicable.

But according to Knight Capital's Mark Lapolla, the days of kumbaya are gone -- today, domestic interests trump global harmony.

As Lapolla sees it, government policy, economic stability and resources are the lynchpins of global trade. And none of the above are currently in a conducive state. We already know that China will do whatever it takes to keep its outsized growth in check, even if it's to our and other nations' detriment.

And let's face it, the Fed's second round of quantitative easing wasn't initiated to make things any easier for anyone but the U.S.

Of course, that didn't turn out quite as planned: Despite the U.S. government's stimulus efforts, stocks are down, interest rates are up, and the commodity sector is weak, circumstances that could set off a global shockwave of inflation.

Adding to this heady mix is the financial mess in Ireland, with potential repercussions reaching far beyond the EU's borders.

Now that the world is done playing nice, Lapolla tells us to expect "a shockingly powerful rally in the dollar, broad-based weakness across the commodities sector." And we'll really see it in emerging markets, where they'll likely be a "dramatic widening" of spreads and "what could prove to be a stampede of hot fund" outflow.

So, which emerging market stocks are expected to see the biggest declines? For an answer, we looked to see what short-sellers are up to. Short-sellers essentially bet on their stocks to lose, selling high in order to buy low.

A short-seller borrows shares from other investors, and then sells them on the open market. Eventually, he closes the short by buying back the same number of shares he initially borrowed. So if he can buy back the stock at a lower price, he nets a profit off the difference.

Short-sellers take on unlimited risk because they (theoretically) have unlimited downside -- if the stock keeps rising, they keep losing. So out of necessity, short-sellers tend to be a bit savvier than your average investor. (Click here to access free, interactive tools to analyze these ideas.)

Here's a list of seven emerging market stocks being targeted by short-sellers. Short trends data sourced from AOL Money. The list has been sorted by the change in the short ratio, which measures how many days of average volume are needed to cover all short positions.

Company

Industry

Short Ratio Trends (7/30-10/29)

Shares Shorted (7/30-10/29)

Cninsure (Nasdaq: CISG  )

Insurance Brokers (China)

Increased from 2.4 days to 7.6 days

Increased from 1.35M shares to 3.23M shares

China Security & Surveillance Technology (NYSE: CSR  )

Security & Protection Services (China)

Increased from 2.8 days to 5.6 days

Increased from 3.73M shares to 6.90M shares

Ctrip.com International Ltd. (Nasdaq: CTRP  )

Consumer Services (China)

Increased from 1.2 days to 3.6 days

Increased from 3.93M shares to 5.64M shares

Deer Consumer Products (Nasdaq: DEER  )

Home Furnishings & Fixtures (China)

Increased from 4 days to 7.2 days

Increased from 1.13M shares to 2.18M shares

Gafisa S.A. (NYSE: GFA  )

Residential Construction (Brazil)

Increased from 2.1 days to 3.9 days

Increased from 5.31M shares to 9.68M shares

hiSoft Technology International Ltd. (Nasdaq: HSFT  )

Business Software & Services (China)

Increased from 0.1 days to 3.5 days

Increased from 15989 shares to 464068 shares

Companhia Siderurgica Nacional (NYSE: SID  )

Steel & Iron (Brazil)

Increased from 1.9 days to 3.2 days

Increased from 10.16M shares to 13.84M shares

Interactive Chart: Press Play to see how analyst ratings have changed for all the stocks mentioned above.


 

Kapitall's Eben Esterhuizen and Alicia Sellitti do not own shares of any companies mentioned.

Ctrip.com International is a Motley Fool Hidden Gems selection. 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. The Motley Fool has a disclosure policy.


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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 November 23, 2010, at 1:03 PM, drdavefp wrote:

    Two weeks ago the Motley Fool reported that CSN was a 5-star caps stock and was ready to take off. Now you report that CSN is a "target for the shorts."

    The latest conclusion is based on a short interest volume (13.9 million shares) in the stock; this volume is less than 1% of the total float (1.5 billion shares). This doesn't meet any reasonable definition of a "heavily shorted stock," nor a "targeted short stock." If it meets your definition, that state in your article what that definition is so we can all learn from it. If you want to look at steel company short postitions, OK, put CSN in a table next to Nucor, Mechel, US Steel, etc, and let's get the comparisons in short positions as a per cent of float, as weel as PE's, ROE, ROI, cash flow, sales margins, net profit, etc. and give your readers some real information so we can compare "apples to apples" instead of apples to koum quats. If you did that for us we could make a better decision about whether CSN is a 5-star stock or one to be shorted. Thanks for you help.

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