The best thing about the stock market is that you can make money in either direction. Historically, stock indexes have tended to trend up over the long term. But when you look at individual stocks, you'll find plenty of stocks that lose money over the long haul. That leaves investors with ample opportunities to make money whether they choose to go buy stocks or sell them short.
A large influx of short-sellers shouldn't be an immediate damning factor to any company, but it could be a red flag from traders that something may not be as cut-and-dried as it appears. Let's take a look at three companies that have seen a rapid increase in the amount of shares currently sold short and see if traders are blowing smoke or if their worry could have some merit.
Company |
Short Percentage Increase Since June 30 |
Short Shares as a Percentage of Float |
---|---|---|
Target |
25.4% | 1.9% |
Goodyear Tire & Rubber |
40.6% | 7.0% |
KB Home |
17.8% | 34.3% |
Source: WSJ.com.
Target
This was sort of a head-scratcher: Who in their right mind would bet against Target? I thought about it more, and the premise does make sense if you expect input costs to rise faster than the company can raise its prices. However, that whole theory drowns when panic-selling events like what we've witnessed the past two weeks occur and many raw material prices fall off a cliff.
Target does face stiff pricing competition from Wal-Mart
Goodyear Tire & Rubber
Just when you thought Goodyear was ready to drive all over consensus estimates, rising costs put a flat in the company's growth outlook. Traders seem to have correctly anticipated the company's earnings shortfall next quarter. In Goodyear's words, it expects raw materials costs to rise in excess of 30% for the second half of this year. So are short-sellers vindicated in their bearishness? Maybe...
While I thought Cooper Tire & Rubber
KB Home
Pop quiz! What do you call a 34% short ratio on KB Home? The right answer.
It seems with nearly every earnings report that KB Home is ready to turn the corner, but alas, it never comes true. One area I continue to remain decidedly bearish on is housing, specifically the middle-to-high income homes that KB specializes in. With a debt-to-equity ratio approaching 400%, and a sea of losses expected this year, I find it difficult to justify why the company is still trading above its book value when peers like MDC Holdings
Foolish roundup
Whether it's rising costs or falling demand, it pays to pay attention to the movement of short-sellers in and out of a stock. While short-sellers may not always have the story right, it's best to be able to see both sides of the story that can, in the end, help protect your portfolio from unnecessary losses.
Do short-sellers have these three companies pegged properly? Share your thoughts in the comments section below and consider adding Target, Goodyear Tire & Rubber, and KB Home to your watchlist.