Short-selling is an important part of the stock markets. It gives investors an opportunity to make pessimistic bets alongside the usual optimistic ones, and to hedge their long positions.
Shorted shares also serve as a barometer of hated and controversial stocks. When share prices skyrocket for no good reason, short-sellers gather in big, cheering crowds. Likewise when management makes huge missteps and Mr. Market overlooks the transgression.
We have some fresh shorting data to work with today, showing short-sale statistics as of the end of February. Remember, these reports turn up only twice a month.
What companies are the short-sellers letting off the hook, and who's under the gun more than ever? Let's dive right in.
Soft signals
Telecom networking equipment maker Alcatel-Lucent (NYSE: ALU) saw its short-sale position jump by a dramatic 53% in two weeks. The influx of 6.8 million new shorting contracts made Alcatel the sixth-fastest jumper by share counts, or No. 31 in percentage terms.
Before you panic and sell every last share of this telecom infrastructure titan, I should note that Alcatel's shorted contingent is still pretty small. Only 0.8% of the share float falls in bearish hands today, even after that sudden surge.
That's on par with some of the least hated stocks on the market and lower than plenty of supposedly low-risk value plays I could mention. In other words, nobody expects Alcatel to declare bankruptcy tomorrow.
Rather, this jump looks like a large-scale hedging action. If you're heavily invested in telecom stocks and want to cut the risks involved with a massive sector play, Alcatel's long reach into every corner of the wireless industry makes it an obvious hedging choice. The stock's high beta value only magnifies this tactic. Short a few shares and sleep better at night.
Perhaps investors are getting nervous about the explosive growth in mobile data, worried that the gravy train could slow down. I'd say it's a little early to make that kind of bearish smartphone bet, but everyone marches to a different drummer.
That prickly BlackBerry bush
That's not to say that the entire smartphone and tablet market is out of the woods. Take BlackBerry maker Research In Motion (Nasdaq: RIMM), for example: The bears smell honey here.
RIM's short sales went from 37.5 million at the end of December to 59.2 million at the end of February. Bearish bets have grown by 160% over the past year, even as share prices cratered:
Pricing data taken from Yahoo! Finance, short-sale info from Nasdaq via Nasdaqtrader.com.
This is a sad story of mismanagement and enormous egos. Investors are losing hope that RIM will ever right this sinking ship. The negative bets took a break in December, as management appeared to change their stiff-necked ways at last. They came back with a vengeance when a long-awaited management shakeup turned out to be like greasing the roulette wheel on the Titanic's casino deck.
Shares are trading near seven-year lows, and short interest is still on the rise. Many investors agree when I say that there's still a long way down to zero for this once-magnificent company and stock. My thumbs-down CAPScall on RIM is doing quite well, thank you.
Let's go to school
If you like controversy, you'll be intrigued to see that private-school operator Bridgepoint Education (NYSE: BPI) has more than half of its shares sold short today. The ratio stands at 55.6% at the latest reading, and that's actually a downtick from the two weeks prior. Private education is an unloved sector in general, but Bridgepoint and ITT Tech parent ITT Educational Services (NYSE: ESI) have far and away the largest short positions in the sector.
Why is Bridgepoint's heavy shorting a controversial position around here? Because we tend to love that stock around Fooldom: Bridgepoint is a five-star CAPS stock and a real-money recommendation in -- count 'em -- three different Motley Fool services. That counts three Rising Stars portfolios as one service, mind you. Some of our analysts even call it a "buy first" stock right now. Foolish support runs deep.
The market seems convinced that Bridgepoint is going out of business, but our analysts don't agree. If they're right, there's one heck of a short squeeze coming Bridgepoint's way someday.
A rare opportunity?
Finally, let's consider rare-earth miner Molycorp (NYSE: MCP). The stock traded for more than 200 times trailing earnings in 2011 but has fallen a long way since then. The short interest is high and rising, jumping another 5.1% in two weeks to land at 34% of the total float.
That rise came as Molycorp reported fourth-quarter earnings. The results were fine, but the forward guidance laced with high operating costs left investors underwhelmed.
Rare-earth elements are important ingredients in today's tech industry. Molycorp is pretty much the only serious supplier outside China, which produces 90% of the global supply today but also consumes most of it. There are other miners, but none that stand ready to process and sell the materials they dig out. Molycorp just solved that quandary by acquiring a production-ready materials processor, sending the stock up by 19% on the announcement. The shorters didn't like that at all.
Do these volatile stocks and short-sale attacks scare you? Fear not, dear Fool. Our top analysts are happy to help you beat a retreat to ultra-safe dividend stocks instead.
