Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



Shorts Are Piling Into These Stocks. Should You Be Worried?

Don't let it get away!

Keep track of the stocks that matter to you.

Help yourself with the Fool's FREE and easy new watchlist service today.

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. According to hedge fund institution Blackstar Funds, even with dividends included, between 1983 and 2006, 64% (nearly two-thirds) of stocks underperformed the Russell 3000, a broad-scope market index.

A large influx of short-sellers shouldn't be a 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.


Short Percentage Increase Since July 15

Short Shares as a Percentage of Float

ConocoPhillips (NYSE: COP  )



Gap (NYSE: GPS  )



Medifast (NYSE: MED  )



Source: The Wall Street Journal.

Traders have a perfectly good reason to be cautious about the price of oil, especially with an economic slowdown looming. The memory of oil's somersault from $147 per barrel down to the mid-$30s in less than one year is still fresh in many traders' minds. But for bears that have increased their short stake in Conoco by 4.3 million shares since July 15, the negative news has been scarce.

Just three weeks prior, Conoco reported its second-quarter results, which easily topped analyst estimates. Conoco is benefiting from higher price realizations as well as better refining margins -- not to mention the buzz associated with splitting its upstream business from the downstream refining business. Conoco is a regular guest on my dividend champion list, having rewarded shareholders with nearly 14% annual growth in its payout over the past decade. Suffice it to say, I feel traders are barking up the wrong tree by betting against Conoco.

To be fair, Gap's problems right now seem to be endemic to much of the apparel sector. Aeropostale (NYSE: ARO  ) and Talbots (NYSE: TLB  ) are two names which have had a hard time hitting the mark recently. But each company has specific troubles of its own to contend with. For Gap, these include adjusting to rising costs and rejuvenating a stale brand name.

All hope isn't lost for Gap shareholders, but there isn't much for them to cheer about. In May, the company drastically lowered its full-year outlook and just a few weeks later outlined plans to close approximately 200 stores. Closing underperforming stores is the first step in cutting costs to maintain profitability, but at some point, investors are going to want to see a return to growth. Now valued at less than 10 times forward earnings, its valuation appears enticing, but the jury is still out on Gap.

On the surface, this weight management and diet products company looks like the next great growth story. Earlier this month, Medifast's second-quarter report detailed a 17% jump in year-over-year revenue on an 8% jump in earnings. But rising expenses could be Medifast's downfall and are a primary reason I feel the shorts may have this one right.

Unlike Weight Watchers (NYSE: WTW  ) , which crushed estimates, Medifast missed the mark in part because of rising advertising expenses. Also working against Medifast is a history of fickle consumer spending habits. A lack of customer loyalty has done NutriSystem (Nasdaq: NTRI  ) in on numerous occasions over the past five years. With a 27% increase in shares currently held short over the past two weeks, this looks like a big red flag.

Foolish roundup
It pays off to stick with products that are in high demand. If you want to avoid a short-seller onslaught, consider investing in companies with sound dividends and stable outlooks. Short-sellers rarely flock to companies exhibiting these traits.

Are the shorts correct to bet against these companies? Share your wisdom in the comments section below and consider adding ConocoPhillips, Gap, and Medifast to your Watchlist.

Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong The Motley Fool owns shares of Gap and Aeropostale. 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 that never needs to be sold short.

Read/Post Comments (1) | Recommend This Article (3)

Comments from our Foolish Readers

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 August 15, 2011, at 1:37 PM, chadhenage13 wrote:

    A quick comment on MED which in fair disclosure I am long. Increased advertising expense was part of the reason but a bigger part is their increased spending in getting more and more Medifast centers opened. They also indicated they are planning on opening even more of these centers in the 3rd and 4th quarter then originally planned. Given these centers are both critical for the public to have a place for the name (much like W.W.) they also represent one of the fastest growing segments of the company's business. While these original opening costs are a one time event and lead to higher advertising initially I believe longer term this expanded presence will serve Medifast well. Last but not least the NutriSystem comparison is not quite fair as I don't know that NutriSystem has over 20,000 doctors supporting their program as MED does.

Add your comment.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1539098, ~/Articles/ArticleHandler.aspx, 10/25/2016 7:06:04 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated Moments ago Sponsored by:
DOW 18,169.27 -53.76 -0.30%
S&P 500 2,143.16 -8.17 -0.38%
NASD 5,283.40 -26.43 -0.50%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

10/25/2016 4:00 PM
COP $41.81 Down -0.43 -1.02%
ConocoPhillips CAPS Rating: ****
GPS $26.61 Up +0.06 +0.23%
Gap CAPS Rating: **
MED $41.64 Up +0.27 +0.65%
Medifast CAPS Rating: **
AROPQ $0.04 Up +0.00 +7.84%
Aeropostale CAPS Rating: *
NTRI $32.10 Down -0.05 -0.16%
NutriSystem CAPS Rating: *
TLB.DL $0.00 Down +0.00 +0.00%
The Talbots, Inc. CAPS Rating: *
WTW $9.97 Down -0.02 -0.20%
Weight Watchers In… CAPS Rating: **