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 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 Nov. 15

Shares Short Oct. 29

% Change

%  Float

CAPS Rating (out of 5)

Bank of Ireland (NYSE: IRE  )

4.6

0.8

476.4%

NM

****

Radian Group (NYSE: RDN  )

17.9

8.1

121.7%

14.0

**

Dean Foods (NYSE: DF  )

8.6

4.4

95.8%

4.9

****

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
It should hardly be a surprise as to why Bank of Ireland is one of the stocks seeing short-sellers piling on. More so than Allied Irish Bank (NYSE: AIB  ) , investors feared Bank of Ireland was about to become an arm of the government, with the state's ownership interest in the bank soaring to as much as 80% from its current 36% position. But the taxpayer bailout the banks got (along with the country itself) helped reverse the psychology surrounding the financial institutions, at least temporarily.

Under the terms of the bailout, Bank of Ireland was given time to raise the additional capital it needs from internal sources. If the bank raises the money wholly through the European Union's support facility, the Irish government would effectively own the bank.

CAPS member RankinCP says the terms of the bailout and how the bank has been allowed to proceed shows that foreign ministers want to keep the institution in private hands:

[Bank of Ireland] is on the verge of a comeback. I like what I have seen in the bailout package thus far and firmly believe it is in the best interest of Ireland and the EU to keep this company a strong privately owned bank. Different situation than [Allied Irish Bank]. Grab your pot of gold with [Bank of Ireland]

Let us know on the Bank of Ireland CAPS page whether there the luck of the Irish can hold out with this stock.

Squeezed to death
According to TransUnion, U.S. mortgage delinquencies declined by their biggest percentage in four years, falling to 6.44% in the quarter, compared to 6.67% in the second quarter. However, that's still higher than the 6.25% of mortgages that were more than 60 days late in the third quarter of last year. And it underscores why investors still find it dicey to dive head first into mortgage insurers like Radian Group, MGIC Investment (NYSE: MTG  ) , or PMI Group (NYSE: PMI  ) .

Rising delinquencies are an indicator of coming defaults, and these companies will be on the hook for the payments. That the velocity of increase has eased up is a welcome reprieve as the housing meltdown caused such insurers to experience huge losses that they've yet to recover from. Radian's losses over the past year are the most since 2007, and PMI's losses are the worst since 2008. MGIC is still hemorrhaging red ink, but around a third the rate it was in 2009.

Despite it's low two-star rating, 66% of the CAPS members rating Radian still think it will be able to post market-beating results. You can keep track of the mortgage insurers rise by adding the stock to your watchlist and having all the Foolish news and analysis aggregated for you in one place.

I'll drink to that!
Excluding today's jobs numbers showing unemployment rising back up to 9.8%, there's been a series of indicators suggesting the economy is finding its legs again. Both the Philadelphia and Dallas Fed reports showed improvements in regional conditions, the Chicago Purchasing Managers Index came in up, and November's manufacturing ISM index was also up.

The mixed signals on the economy has the analysts at Standard & Poor's thinking Dean Foods is going to have a hard time overcoming the headwinds that have soured its performance for much of the year. Lower sales volumes, higher raw materials costs, and pricing pressures are just some of the problems that have spoiled the dairy producer's performance.

It's the same sort of factors that depressed valuations at Russian kefir drink producer Wimm-Bill-Dann, which PepsiCo (NYSE: PEP  ) just offered to buy a majority stake for $3.8 billion. Margins in its dairy segment have come under pressure because of higher raw milk costs. And because it's been an industrywide issue, investors feel there's some big potential for Dean Foods to surprise the markets going forward.

CAPS member plinyplatypus believes its Silk soy milk and other alternative dairy products are finding a fan base:

[Dean Foods] sells foods; while not sexy, population is increasing and food isn't going out of demand. More importantly, soy milks and alternative products are highly profitable and are becoming increasingly popular.

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!

PepsiCo is a Motley Fool Income Investor recommendation. Motley Fool Options has recommended a diagonal call position on PepsiCo. 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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