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 May 31 to June 15

Short Shares as a % of Float

Johnson & Johnson (NYSE: JNJ  ) 450.0% 9.5%
Altria (NYSE: MO  ) 152.3% 2.5%
ONEOK (NYSE: OKE  ) 454.8% 2.6%

Source: The Wall Street Journal.

Synthes-size me!
Are the Mayans right and I somehow didn't get the memo? An additional 214.3 million shares were freshly short-sold on Johnson & Johnson, a name well-known for its stability during times of increased volatility. I can only see two catalysts that would cause investors to dive into J&J with such forcefulness on the short side.

First, weakness in Procter & Gamble's (NYSE: PG  ) earnings guidance for a second consecutive quarter could hold some water. Although Procter & Gamble is a consumer goods company and J&J is a diversified health-care products company, both are stable necessity-providers that are rarely susceptible to economic slowdowns. With P&G warning that growth slowdown in China is affecting sales, it could be a warning to J&J shareholders.

The other possible reason for the short-selling deluge could have been uncertainty over J&J's $19.7 billion deal to buy device maker Synthes. That worry was thrown out with the bathwater just over two weeks ago, as the deal was approved by regulators. What really impressed investors who sent the stock higher was news that it plans to finance the deal with cash on hand through share repurchases from its subsidiary Jannsen Pharmaceuticals.

Short J&J here? Yeah, I don't think so!

Down to the butt?
Unlike J&J, there seem to be valid reasons to be both an optimist and a pessimist on Altria.

Optimists can point to Altria's history of healthy dividend growth and its premium Marlboro brand commanding nearly half of the U.S. premium cigarette market share. Altria's smokeless tobacco sector has also shown strong growth in recent quarters as consumers look for potentially safer ways to satisfy their tobacco addiction.

On the other side of the coin, Altria investors have a lot to worry about from a regulatory perspective. The company is facing a triple whammy: an anti-smoking advertising campaign from the Centers for Disease Control and Prevention, an attempt by the Food and Drug Administration to obtain cigarette ingredient information, and an FDA bill requiring warning labels to be placed on cigarette packaging (which a U.S. judge has temporarily blocked).

Philip Morris International still appears to be the better tobacco buy here as its international exposure reduces the legal implications Altria is facing. With layoffs looming and an increased advertising budget propping up Marlboro sales, I'd have to say I'm siding with the pessimists.

A suicide bet
Perhaps the move that makes the least amount of sense is the huge increase in short interest in natural gas processor ONEOK.

Natural gas prices may be depressed near decade-low levels and oil and gas companies are definitely hurting from weaker selling prices, but demand for transporting and processing the cleaner-burning fuel and natural gas liquids has increased dramatically -- all great news for ONEOK. The company recently forecast growth of 18% through 2014 as it ramps up spending at its limited partnership, ONEOK Partners (NYSE: OKS  ) . ONEOK also anticipates boosting its dividend by 40% between 2012 and 2014. As the final coup de grace to short-sellers, it entered into a $150 million accelerated stock buyback agreement with Goldman Sachs.

ONEOK is doing everything within its power to increase shareholder value in an otherwise difficult market for natural gas-based stocks. I feel short-sellers would be making a suicide bet to go against figures as strong as ONEOK is forecasting.

Foolish roundup
This week we looked at three high-profile names that, under normal circumstances, draw very little attention from short-sellers. Although macroeconomic headwinds remain for all three, only Altria, with its many regulatory hurdles, looks like it could head lower.

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 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 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 Johnson & Johnson. Motley Fool newsletter services have recommended buying shares of Johnson & Johnson, Procter & Gamble, ONEOK Partners, and Goldman Sachs, as well as creating a diagonal call position in Johnson & Johnson. 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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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 July 02, 2012, at 10:28 PM, mansourg54 wrote:

    I know that MO buys back its shares and every year increases its dividends, so a pullback is unlikely.

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