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 whether their worry has some merit.

Company

Short % Increase April 30-May 15

Short Shares as a % of Float

Disney (NYSE: DIS  ) 22.3% 2.6%
Coca-Cola (NYSE: KO  ) 24.7% 1.1%
Citigroup (NYSE: C  ) 15.5% 1.2%

Source: The Wall Street Journal.

Mickey's sweet "avenge"
Investors who were betting on Mickey's sweet demise have been in for a true surprise recently. Disney, which lost former film chief Rich Ross in April when he resigned following the monumental $200 million John Carter flop, has once again proven that it can handle potentially the biggest motion picture setback in history and still come out leaps and bounds ahead of its peers.

Disney's blockbuster, The Avengers, has already become the third-highest grossing film of all-time and second-highest grossing movie globally... and it's only been out a few weeks. This comes in stark contrast to Lions Gate Entertainment (NYSE: LGF  ) , whose studios have produced blockbusters only sporadically, resulting in annual losses in seven of the past 10 years.

The real positive is that it isn't just Disney's studio business that can boost its bottom line, but all of its business segments. In its latest quarterly report, Disney's media networks saw a near double-digit rise in revenue, while its theme parks and resorts did note a 10% revenue boost. It's no wonder that with Disney seeing record profits, it was able to boost its dividend by 50%, its largest hike ever, in December. Don't be surprised if a metaphorical anvil gets dropped on short-sellers heads if this keeps up.

All warm and bubbly
With the market swooning, short-sellers are having a hard time grasping Coca-Cola's valuation, as the world's top beverage maker has hit multiple new highs. Short-sellers are learning, however, that just because the indexes are down, that doesn't mean Coca-Cola, the most valuable brand in the world, will be following suit.

In Coke's latest quarter, it recorded its strongest growth in emerging markets, with India (20%) and China (9%) packing quite a punch in its bottom line. Global volume grew by 5% as the company outlined its plan to focus on growing its presence in North American markets (which saw sales rise by 2%), which it views as a key growth driver. That announcement surprised some investors; they see the North American market as quite saturated. However, Coke's strength in its energy drink business compounded with the fact that PepsiCo (NYSE: PEP  ) is struggling to maintain market share domestically, might be exactly what Coca-Cola's management is envisioning. This warm and fuzzy outlook may not bode well for current short-sellers.

Under pressure
Shareholders of Citigroup might feel like their stock is under pressure lately, given the seemingly endless eurozone debt worries. But, based on the company's first-quarter results released in April, I'd have to say that things couldn't appear to be further from the truth.

Loan growth remains challenging in the U.S. and Europe as is to be expected, but other segments of Citigroup's business are considerably stronger than many on Wall Street had anticipated. Strong loan growth in the emerging markets and a 7% reduction in expenses helped buoy Citigroup's growth despite a double-digit decline in investment banking revenue. Most importantly, Citigroup's results benefited from a $1.2 billion release of loan-loss reserves as credit card delinquencies fell by 31%.

With Citigroup now sporting a well-capitalized tier-1 common ratio of 12.4% and trading at just 43% of book value, short-sellers may not be making a smart bet on Citigroup.

Foolish roundup
The reason these three high-profile names were chosen was to convey that while things may seem challenging now, the overall valuations of these companies remains compelling. In short, none of them appears to be a good short-selling candidate.

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.

The Motley Fool owns shares of Disney, Coca-Cola, PepsiCo, and Citigroup. Motley Fool newsletter services have recommended buying shares of Disney, Coca-Cola, and PepsiCo, as well as creating a diagonal call position in PepsiCo. 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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