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, Oct. 14 to Oct. 31

Short Shares as a Percentage of Float

Rio Tinto (NYSE: RIO  ) 20.4% NA
Suntech Power Holdings (NYSE: STP  ) 11.8% 11.4%
Direxion Small Cap Bull 3X Shares (NYSE: TNA  ) 198.9% NA

Source: The Wall Street Journal. NA = not available.

Can you dig it?
So you want to bet against one of the largest mining and mineral resource companies in the world? I bid you good luck, short-sellers.

Rio Tinto shares have shed more than a quarter of their value since August on news of slower growth in China and uncertainty over the demand for mineral resources in Europe as long as Greece and Italy continue to weigh things down. My response to these claims is that the last time I looked, China was still growing. Sure, the days of 10% GDP growth may be gone, but estimates from the World Bank for 8.7% GDP growth in 2012 are nothing to sneeze at. From gold to diamonds to iron ore, Rio Tinto can supply it all, which gives it plenty of commodity diversification. At just six times trailing-12-month earnings and five times operating cash flow, Rio Tinto is as cheap as it has been in three years. Bet against this stock at your own risk!

So long, solar
Maybe the only sector able to give the housing sector a run for its money in the futility department of late is the solar sector. Due to rapidly falling solar panel prices and demand from many of the sector's largest buyers in Europe drying up because of the ongoing sovereign debt crisis, companies have been lining up one by one to take their lumps. So far we've witnessed the foundation fall out from underneath ReneSola (NYSE: SOL  ) , JinkoSolar Holdings (NYSE: JKS  ) , and LDK Solar (NYSE: LDK  ) . With Suntech Power reporting later this week, I see no reason to expect anything different.

Suntech is on my growing list of solar companies that could be forced to consolidate because of high levels of debt and rapidly deteriorating pricing power. Priced at only 26% of book value, the stock may look tempting, but I'm not crazy enough to buy into the current death spiral the entire sector is exhibiting. Shorts, it's all yours!

The worst investment...ever?
Fear not solar buffs, there are still far worse investments out there than buying into solar -- and triple-levered ETFs be thy name!

Whoever in their right mind thought the concept of buying into a triple leveraged ETF was a great idea needs a thump or two on the head, because they are simply instruments of mass wealth destruction. Between the Direxion Small Cap 3X Bull Shares and the Direxion Small Cap 3X Bear Shares (NYSE: TZA  ) , I firmly believe there will be no winner. Daily rebalancing and the leverage alone will destroy the value of any long-term investor -- and likely any trader for that matter. So, not to beat a dead horse, but rather to kick it repeatedly while it's down, stay away from these investment vehicles altogether.

Foolish roundup
This week I'm just sticking with what appears obvious. Namely, that China is growing, solar is slowing, and leveraged ETFs are long-term wealth-killers.

What's your take on these three stocks? Do the short-sellers have these stocks pegged, or are they blowing smoke? Share your thoughts in the comments section below and consider adding Rio Tinto, Suntech Power Holdings, and Direxion Small Cap Bull 3X Shares to your free and personalized watchlist to keep up on the latest news with each company. 
 

Fool contributor Sean Williams has no material interest in any companies mentioned in this article. He assures you no horses were harmed during the writing of this article. You can follow him on CAPS under the screen name TMFUltraLong , track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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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