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 and aim to turn their pessimism into potential profits.

These are the top companies on the New York Stock Exchange with the largest percentage increases in shares short. Combining that data 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.

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
The truck industry in China put the pedal to the metal last year, with sales of heavy-duty commercial vehicles racing 60% higher to more than 1 million vehicles. Including both medium-duty trucks and medium- and heavy-duty buses, the total commercial-vehicle market expanded to 1.4 million vehicles. The wide opportunity referenced there helps explain why China Yuchai International has largely succeeded as the country's leading diesel-engine maker.

Maintaining that sort of full-throttle growth, though, isn't easy, and it was expected that there would be cutbacks, particularly with the government trying to dampen a red-hot economy. Yuchai's first-quarter results bore out that thesis, as revenues fell almost 18%, causing profits to contract by 9% from the year-ago period.

No doubt the shorts have piled in because of these short-term issues, but the long-term outlook remains bright. Investors might want to consider Yuchai's reduced price as a buying opportunity. U.S. diesel-engine maker Cummins remains Yuchai's primary rival, but Navistar International (NYSE: NAV) and Caterpillar both see China as a growth market. Navistar's entered into a joint venture to build diesel engines, and Caterpillar is looking to make commercial vehicles for the Chinese market. That might signal increased competition for Yuchai, but it also marks a healthy respect for the very big opportunities present.

Analysts note that half of the world's heavy trucks are made in China, but 95% of the brands sold are domestic. China Yuchai's status as a local hero has a decided advantage here.

CAPS member CRACKTACTOR says when it comes to Yuchai, investors don't have to worry about the usual China angle: "If one can muster the courage to ignore our inherent fears about Chinese securities, this is a good bet. After all, the building boom continues, and there's not an industrial application that these guys don't make an engine for."

Step on the gas -- get to the China Yuchai CAPS page and let us know when you think the company will hit the bend in the road.

Dirtying its hands
It's easy to get sucked into the idea that the delicious dividend yields from REITs such as ARMOUR Residential REIT (18.7%), American Capitan Agency (Nasdaq: AGNC) (18.6%), or Chimera Investment (NYSE: CIM) (15.6%) are reason enough to buy their stock.

But a damaged market could affect their ability to continue paying those amounts out. CAPS member alelecole looks at the likelihood of whether ARMOUR in particular will be able to continue to perform as it has.

This is a play on the market correction. As the world economy slows with China, India, Brazil and the EU all raising rates ten year rates are falling. This means bonds and reits will outperform stocks unless the fed can find a way out of this slowdown.

The CAPS community is also hopeful as 100%, of those rating the stock see it going on to beat the indexes. You can add it to your watchlist to keep track of its developments, and you can share your thoughts on the ARMOUR Residential REIT CAPS page.

Squeezed to death
With its own dividend yield standing just below 5%, Penn West Energy is no shrinking violet for dividend investors, either. It also offers the benefit of strong operations and a business model that can withstand economic vagaries. Last quarter saw unrealized hedging losses swiping some performance points, but year-over-year oil and natural-gas sales rose 5%, generating net profits that tripled from the year ago period.

Yet Penn West wasn't alone in feeling the effects of hedging losses. As Fool contributor Isac Simon points out, Brigham Exploration (Nasdaq: BEXP) and Anadarko Petroleum recorded losses, too. In fact, a large swath of the sector was affected.

It doesn't take much to convince CAPS investors of Penn West's potential, as 97% of those rating the oil and gas explorer think it will continue outperforming the broad market averages. Add the stock to the Fool's free portfolio tracker to find out how Penn West hedges its bets in the future.

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!