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

TJX (NYSE: TJX  ) 79% 1.3%
BB&T (NYSE: BBT  ) 30.1% 2.5%
CARBO Ceramics (NYSE: CRR  ) 25.1% 29.3%

Source: The Wall Street Journal.

Still a bargain
TJX, known for attracting cost-conscious shoppers, appears to be a retail force that just can't be stopped. I can understand short-sellers want to bet against a stock that does nothing but go higher, but it doesn't seem like a smart move in this case.

According to February's U.S. retail sales data, TJX and discounting peer Ross Stores (Nasdaq: ROST  ) both grew same-store sales by 9%-both far higher than Wall Street had been expecting. In short, price is still a very important factor when it comes to getting consumers to open up their wallet. TJX, which operates T.J. Maxx, Marshalls, and HomeGoods stores throughout the U.S., stated that its inventory is "extremely fluid," which leads me to believe a strong earnings report is around the corner. I, for one, wouldn't dare bet into that sort of strength.

Don't bank on this merger
For the most part, BB&T survived the credit crisis in better shape than most banks. Unfortunately, BB&T's growth, three years after the height of the crisis, seems to have stalled out. One avenue BB&T had been looking toward is acquiring the assets of Florida bank BankAtlantic Bancorp. BB&T shareholders cheered the deal to bring new assets into the fold, and BankAtlantic's stock popped more than 200% shortly after the deal was announced.

But what a difference five months can make. The deal was rejected by a Delaware court two weeks ago after it was discovered that BB&T was set to take hold of BankAtlantic's prime assets while leaving potentially toxic debts to be absorbed by the remaining shell of BankAtlantic, violating the terms of its trust preferred securities. Although I'd call this deal far from dead, it definitely leaves BB&T struggling for ways to grow its business. I wouldn't say short-sellers have this one in the bag, but with some banks still trading below book, BB&T at 116% of book value looks to be a rich valuation for a stagnant business model.

Drill, baby, drill... pretty please?
Cheap natural gas means good news for consumers and a potentially cleaner, cheaper alternative fuel for electric utilities. But for oil and gas operators, weaker natural gas prices aren't facilitating the desire to drill with supplies already near record highs. In January, Chesapeake Energy (NYSE: CHK  ) announced it would reduce its dry gas capital expenditures by 70% in the upcoming year, with EnCana following suit with a cut of its own last month.

This could be particularly bad news in the short-term for CARBO Ceramics, which supplies proppant used in the fracking of oil and natural gas wells. Personally, I'm a natural gas bull and think its long-term future is perfectly healthy. Similarly, Fool Jason Moser has talked about why he feels CARBO is a company worth buying for his Motley Fool Rising Stars portfolio and why the long-term outlook for fracking is unchanged. I happen to agree that over the long term, CARBO looks poised to be a winner.

Foolish roundup
Sometimes the trend really is your friend. TJX and CARBO look like companies that have long-term staying power, while BB&T has its work cut out in finding new paths to growth.

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 has purchased way too many T.J. Maxx gift cards for his house sitter. 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 CARBO Ceramics. Motley Fool newsletter services have recommended buying shares of Chesapeake Energy. 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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