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% of stocks -- nearly two-thirds -- 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 look at three companies that have seen a rapid increase in the amount of shares currently sold short and see whether traders are blowing smoke or their worry has some merit.

Company

Short Percentage Increase Jan. 13 to Jan. 31

Short Shares as a Percentage of Float

Cloud Peak Energy (NYSE: CLD  ) 67% 9.2%
Anheuser-Busch InBev (NYSE: BUD  ) 74.5% 0.2%
Cabot Oil & Gas (NYSE: COG  ) 46.6% 3.1%

Source: The Wall Street Journal.

A mass exodus?
Coal companies might as well be thrown into the corner and covered in caution tape given the way the sector is being treated by Wall Street. A milder winter and cheaper natural gas prices are fueling a trend whereby electric utilities are choosing to make the switch from coal to gas in order to reduce costs. Cloud Peak Energy is just one of many coal companies suffering under the weight of this switch.

What we need to remember is that coal is still responsible for nearly half of all electricity generation in the U.S. and winter weather patterns can change in a heartbeat. Cloud's results, at least to me, don't signify that the company is in dire straits. The company's Asian exports rose by 42% to 4.7 million tons, and it has practically all of its orders for 2012 and most of its 2013 orders already locked in under contract. I, for one, wouldn't dare bet against Cloud Peak at just below nine times forward earnings.

Is it really good to be the king?
Are tough times really ahead for the "King of Beers"? Anheuser-Busch InBev's Budweiser lost its No. 2 ranking in the United States to Molson Coors' (NYSE: TAP  ) Coors Light last month. Overall volume for Budweiser has been on a multi-decade slide as consumers turn to lower-calorie forms of beer. But to think that Anheuser-Busch might be in for tough times just because Bud is no longer a best-seller isn't a strong enough argument for me.

The company's Focus Brands volume grew by 1.1% during the third quarter, and total revenue rose by 3.6%. What weakness was exhibited in the U.S. was more than made up for by strength coming from elsewhere around the globe. It's also worth mentioning that because of Anheuser-Busch's huge float, a 75% jump in shares sold short hardly made a dent in total shares held short as a percentage of float. Anheuser-Busch is a model of consistency and not a stock I would personally bet against.

The dreaded Catch-22
The dreaded Catch-22 for natural gas companies is that demand from electric utilities is surging because of decade-low prices, but overall revenue remains constrained ... because of decade-low prices. Somehow, a few natural gas explorers have avoided being thrown out with the bathwater. Cabot Oil & Gas is one such company.

Cabot, which pays out a pittance of a dividend, is at serious risk of having its earnings potential squeezed from falling natural gas prices. Though it's a former favorite of mine, I am more than willing not to fall in love with the stock at these levels. Cabot is trading at 42 times forward earnings and just below four times book value. On the other hand, a current personal favorite of mine, EXCO Resources (NYSE: XCO  ) , offers a forward P/E of 15, a yield over 2%, and trades below book value. As I see it, short-sellers have every reason to be skeptical of Cabot's valuation.

Foolish roundup
The theme for this week is attempting to keep your emotions in check. Investors seem overwhelmed by the rapid decline in coal demand because of the warmer winter, yet also seem to overlook frothy metrics when it involves a top performer in 2011. Keeping your head on straight is one key to successful investing.

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 these stocks to your free and personalized watchlist to keep up on the latest news with each company.

Also, if you'd like to avoid the potential pitfalls that high short interest can bring, I suggest you download a copy of our latest special report: "The Motley Fool's Top Stock for 2012." In it, our chief investment officer gives you the skinny on a company he has dubbed the "Costco of Latin America." Best of all, this report is completely free, but only for a limited time. Don't miss out!

Fool contributor Sean Williams has no material interest in any companies mentioned in this article. He's curious if a Coors Light would kill a werewolf since it is the "Silver Bullet." 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.

The Motley Fool owns shares of Molson Coors. Motley Fool newsletter services have recommended buying shares of Molson Coors. 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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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 February 28, 2012, at 5:50 AM, rsinj wrote:

    Maybe XCO longs should be skeptical of all the articles which have continually come out over the past 6 months with the same incorrect logic as yours?

    Go recalculate what the book value is when you look at their just-released numbers.

    Go look how long-term debt is now nearly $1.9 billion.

    The forward PE for XCO is not 15, but much higher - because the earnings estimate is way off-base. In fact, since the company will be posting losses, you should probably disregard PE entirely, and instead look to PEG - which clearly shows XCO is not investment material with current year earnings down, and next year to be even lower.

    Why don't you go look at a couple of those prior articles, even over the past few weeks that touted the current/forward PE, and then in light of what the company has announced with earnings a few days ago.

    Current consensus estimates for 2012 earnings is 39 cents/share, and that is only because most analysts have not lowered theirs yet. Someone still has a 85 cent estimate which is clearly unrealistic under any circumstance. And look at 2013, current consensus is at 22 cents/share and someone already has a 15 cent/share LOSS in there. Let's not even discuss what the numbers would be if we looked at GAAP earnings - we're at only 10 cents/share for 2011 and not some fudged number of 56 cents/share.

    I also believe that XCO's dividend is at risk, so it would be wise (if I were an investor) to discount that at this point in the game. You're likely going to lose more than that in the stock price fairly quickly.

    You should be worried.

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