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 sold short and see whether traders are blowing smoke or their worry has some merit.

Company

Short % Increase From April 30 to May 15

Short Shares as a % of Float

Arrow Electronics (NYSE: ARW  ) 65.1% 1.5%
Meredith (NYSE: MDP  ) 28% 35.3%
US Airways (NYSE: LCC  ) 26.2% 15.1%

Source: The Wall Street Journal.

Shot through the heart -- are you too late?
There's nothing quite like beginning the week with a terrible music pun.

Arrow Electronics, a manufacturer of electronic components and provider of enterprise computing services, is a cyclical company that's very dependent on the health of the global economy. While that makes the company's growth patterns somewhat predictable, it doesn't make valuing the stock any easier.

Based on its latest earnings report, weakness in European markets and a slowdown in Chinese demand caused sales in its electrical-component segment to fall nearly 14%. However, its enterprise computing solutions segment saw strong growth of 15% year over year but still fell 23% from the previous quarter.

Arrow is doing what it can to stem the recent slide in its stock price, including authorizing an additional $200 million for share buybacks on top of the $100 million remaining under its original share repurchase agreement. Despite the lack of revenue growth, operating margins aren't falling, and the company's still seeing strong profits. At just six times forward earnings, short-sellers may have already missed their boat here. Then again, weakness in Europe doesn't exactly create a sense of urgency to buy the stock. It could be worth avoiding altogether.

Black and white and read all over
I've yet to see a pig fly, but I have seen a dinosaur come back from the dead.

Meredith, a media and advertising company, wasn't exactly dead, but its printing business was losing steam because of the shift toward digital content. With a few tweaks to this well-oiled machine, things seem to be improving yet again.

The key to Meredith's future lies in its ability to infiltrate mainstream media and to garner as many readers and viewers as possible. It has done this by extending its partnership with Wal-Mart (NYSE: WMT  ) through 2016 to sell its Better Homes and Gardens brand of products and by purchasing the world's No. 1 digital food site, Allrecipes.com, for $175 million in order to double the size of its Women's Network. While the move is dilutive to earnings in 2012, it's expected to turn accretive in 2013 and after. Political-ad revenue should also boost the company's bottom line in the latter half of the year.

The thing to remember is that Rome wasn't built in a day, and a turnaround won't happen overnight. Although Meredith's adjusted earnings fell marginally in the third quarter, it nonetheless remains profitable and has a great dividend to boot. I can't say I'm with the short-sellers on this one.

A crude awakening
Sorry, no bad puns here; airlines generally do a good enough job of making fun of themselves.

There's not an airline out there that enjoys seeing oil fall almost every day more than US Airways. It is the only major airline not to hedge its fuel costs, which means it sees the most direct benefit to its bottom line when oil and jet fuel prices drop. With jet fuel costs down more than $0.40 per gallon -- about 10% -- since February, US Airways has a shot to surprise investors in the next few quarters.

However, we can't forget the long-term outlook for the airline industry -- the one that involves more than 100 bankruptcies since 1990 and a shift toward smaller, regional airlines that offer teaser ticket rates. A regional player like Spirit Airlines (Nasdaq: SAVE  ) , which offers passengers the option to choose their fees, has packed high-margin ancillary fees into its bottom-line profits while maintaining a pristine, debt-free balance sheet. It also possesses significantly more route flexibility than US Airways and the other national carriers.

Even though the short-term move in oil looks good for US Airways' bottom line, it remains a poor investment in my books and appears to be good fodder for short-sellers at these levels.

Foolish roundup
This week we took a look at three stocks in questionable sector. Arrow and Meredith are doing what they can to innovate, cut costs, and reward shareholders. US Airways, on the other hand, has had the tendency to suck shareholders dry over the years and has done little to out-innovate its peers.

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 using the links below to add these stocks to your free and personalized watchlist and 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. 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.

Motley Fool newsletter services have recommended creating a diagonal call position in Wal-Mart. 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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