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

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.

Company

Short Percentage Increase Since July 15

Short Shares as a Percentage of Float

Capital One Financial (NYSE: COF  ) 143.4% 6.5%
GlaxoSmithKline (NYSE: GSK  ) 90.7% 0.4%
ManpowerGroup (NYSE: MAN  ) 83.8% 2.8%

Source: Wall Street Journal.

Capital One Financial
Arguably one of the healthiest larger banks, Capital One was a surprise as a recent target of short-sellers. Having doubled their positions since July 15, my only inclination is traders are betting on a wave of rising credit card delinquencies if the economy were to double-dip.

The problem I have with this thesis is that Capital One has maintained one of the lowest credit default rates of all major banks. In July, U.S. charge-offs fell to 3.77%, marking the fourth consecutive month that its default rate remained below 5%. Even the company's month-over-month international charge-offs fell from 7.19% to 6.59%. It's not surprising then that Capital One has trounced analyst estimates over the past year. Following Visa's (NYSE: V  ) and MasterCard's (NYSE: MA  ) earnings reports, it appears Capital One is on solid footing, and short-sellers should be quaking in their boots.

GlaxoSmithKline
It's probably not time to throw in the towel yet on big pharmaceutical names like Glaxo, but if I were a shareholder, I'd have my contingency plans handy.

The concern with Glaxo is the pending patent cliff that is rapidly approaching for two of its blockbuster drugs: Seretide (commonly known as Advair) and diabetes drug Avandia. Slated to lose exclusivity prior to end of 2012, perhaps the only saving grace for Glaxo is that generic pharmaceutical vultures such as Teva Pharmaceutical (Nasdaq: TEVA  ) have thus far been unsuccessful in their attempts to duplicate a generic version of Advair. Still, this patent cliff puts nearly one-quarter of Glaxo's revenue stream at risk of a serious haircut. Now is not the time for shareholders to panic, but consider this company on watch.

ManpowerGroup
Now here's a company that short-sellers have every right to be circling like vultures. I know what you must be thinking, "But Manpower is trading at a forward P/E of less than nine!" While at the moment that's correct, the economic forecast from the Federal Reserve paints a very bleak picture about economic growth and unemployment over the next few years.

As Cleveland Federal Reserve Bank President Sandra Pianalto said last week, "I think it will take quite a few years for the unemployment rate to fall to more typical levels, in the neighborhood of 5.5%." Considering that Manpower provides short-term labor contracts, this could be a damaging blow to its business. In addition, data for July showed that 28 states experienced rising unemployment rates. In this instance, I whole-heartedly agree with the short-sellers.

Foolish roundup
It's the economy, stupid! For companies that have been conservative with their borrowing and business practices, investors will almost certainly be more lenient if the economy worsens. For other's whose business is directly tied to the economy, it c ould be an open invitation to run for the hills.

What's your take on these three companies? Are short-sellers blowing smoke or do they have sound reasoning for their bearishness. State your case in the comments section below and consider adding Capital One, GlaxoSmithKline, and Manpower 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 GlaxoSmithKline and Teva Pharmaceutical. Motley Fool newsletter services have recommended buying shares of Visa, GlaxoSmithKline, and Teva Pharmaceutical. 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.


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