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 whether their worry has some merit.

Company

Short Percentage Increase Jan. 31 to Feb. 15

Short Shares as a Percentage of Float

Market Vectors Oil Services ETF (AMEX: OIH  ) 314.2% NM
Pitney Bowes (NYSE: PBI  ) 33.7% 23.2%
Eastman Chemical (NYSE: EMN  ) 189.3% 4.3%

Source: The Wall Street Journal. NM = not meaningful; ETFs don't have a fixed share count.

Necessary evil
Most of my friends hate the concept of the United States paying top dollar for foreign-sourced oil. As for me, I'm a realist. I understand that while oil is evil in that it makes the U.S. dependent on outside countries for its energy needs, it's also a necessary part of all of our lives. With that said, I think those betting against oil service companies are taking a big gamble.

Oil is one of the more emotionally influenced commodities. Right now instability surrounding Iran, tensions in the Middle East between Israel and Syria, and even technical trends are enough to get traders to push oil near $110/barrel. As oil prices rise, the demand for oil services (exploration, drilling, and refining) are only bound to increase. Now is actually the time to begin looking at the Market Vectors Oil Services ETF as a buy, if you ask me.

Post-mortem office
Video killed the radio star, and email is slowly killing the U.S. Postal Service. I see that as bad news for the nation's largest mail equipment and software manufacturer, Pitney Bowes.

It's not a matter of staying profitable, because Pitney Bowes does have sufficiently strong cash flow to support a hefty dividend yield currently north of 8%. What is concerning is the consistent decline in mail volume and the company's lackluster guidance in 2012 for revenue growth of 2% to minus 2%. Although the U.S. Postal Service isn't its only client, it does represent a significant amount of Pitney Bowes' yearly revenue.

Even those who still use snail mail have often chosen to bypass the post office altogether, with competitor Stamps.com (Nasdaq: STMP  ) reaping the rewards. The do-it-yourself stamp printing service saw sales rise 20% in the fourth quarter with net income jumping 17%. Pitney Bowes' business is bleeding and short-sellers are merely the vultures lying in wait.

Volatile chemicals?
Hey, does anyone want to let short-sellers know that they're betting against the wrong "Eastman"? Just because Eastman Chemical has the same namesake as the now-bankrupt Eastman Kodak doesn't mean they share any similarities whatsoever beyond their founder.

Eastman has been making big waves over the past year with its aggressive approach to acquisitions. In January, the company announced a $3.4 billion buyout of performance materials and specialty chemicals maker Solutia (NYSE: SOA  ) . This comes on top of adding Sterling and Scandiflex to its already diverse business line in 2011. The Solutia transaction is also expected to be immediately accretive to Eastman. With the stock at a forward P/E of just 10 and a dividend yield just shy of 2%, I think you'd have to have a chemical imbalance to bet against it.

Foolish roundup
Long-term business trends are the focus this week. Pitney Bowes has some work to do to correct what appears to be a serious threat to its long-term growth. Oil and chemicals, on the other hand, look like they'll continue to perform well.

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 vaguely remembers what the inside of his local post office looks like. 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.


Read/Post Comments (1) | Recommend This Article (7)

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 March 05, 2012, at 4:49 PM, WVAnonymous wrote:

    I'll be the first to suggest opening a long position in PBI. It looks like a short squeeze is a done deal, and the dividend pays you to wait for it. Full disclosure: I very recently opened a long position in PBI, with a limit order to cash out on the squeeze.

Add your comment.

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: 1800550, ~/Articles/ArticleHandler.aspx, 11/23/2014 7:28:47 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...


Advertisement