Do the Shorts Know Something You Don't?

Since everyone loves a winner, it's reasonable to assume that everyone hates a loser -- everyone but short sellers, at least. These contrarian investors bet that hot stocks are primed to fall, aiming to turn their pessimism into potential profits.

These companies had some of the largest percentage increases in shares sold short. Combining that with the collective intelligence of Motley Fool CAPS, we'll see which of these companies Fools believe have the power to make short work of short-sellers.

Company

Shares Short
Jun 15

Shares Short
May 31

% Change

%   Float

CAPS Rating (out of 5)

Barrick Gold (NYSE: ABX  )

9.6

5.5

73.3%

1.0%

***


Capstone Turbine
(Nasdaq: CPST  )

52.4

51.2

2.5%

17.7%

***

Sources: wsj.com. Share counts in millions.

Of course, this isn't a list of stocks to buy -- or short! These stocks could have serious problems that warrant their short interest, but they might also be undergoing  short-term troubles. Only Foolish due diligence will tell you for certain; our 180,000-strong CAPS community offers  a good place to start.

Get to work!
Only 80,000 new jobs were created in June, which means that, following an upwardly revised 77,000 jobs in May (and a downwardly revised 69,000 jobs in April), the economy is stagnating and not getting better. Coming on the heels, as it did, of a report that showed U.S. manufacturing was contracting once again -- the first time in three years the Institute for Supply Management's index fell below 50% -- and we have a picture of a market in a rout. And the stock market responded by plunging 145 points in early trading today.

That might normally be a scenario to cause gold to spike and, initially it did, but it wasn't so bad as to think the Fed will start pumping large amounts of new cash into the economy, and gold prices ended up turning tail. But investors can believe that it does lay the framework for future spikes.

Barrick Gold shares are down more than 2% today, no doubt following the price of gold, but it has other issues besetting it that likely encourage short sellers to pile in. For example, it lost its lawsuit against Goldcorp (NYSE: GG  ) to block its acquisition of a Chilean copper and gold mine, and Argentina's high court just upheld a law banning mining in the Andean glaciers, where Barrick was developing its Pascua Lama project, a huge $5 billion gold and silver mine. That could be particularly troublesome as Barrick promised Silver Wheaton (NYSE: SLW  ) 25% of the silver streams extracted from the mine when production began.

While it's still partners with Goldcorp on the potentially lucrative Pueblo Viejo mine, it's easy to see where the shorts see potential.

Over 2,100 CAPS members have weighed in on Barrick Gold, and 94% see it surmounting these obstacles. For example, Silver Wheaton has rights until 2013 to 100% of the silver from three other mines that Barrick operates, but if Pascua Lama isn't three-quarters completed by 2015, Silver Wheaton will get enough silver from the other three mines to make up the difference. So it would be a lost opportunity to be sure, but not a complete bust.

Tell me in the comments section below, or on the Barrick Gold CAPS page, if it's time for the shorts to close out their positions. Then add the stock to your Watchlist to see if there's a silver lining here.

Riding the coattails higher
Like gold, the natural gas industry has suffered weakness, too, but for entirely different reasons. It's flush with inventory, and the glut has depressed prices. Now, drillers like ATPG Oil & Gas (Nasdaq: ATPG  ) , Kodiak Oil & Gas (NYSE: KOG  ) , and EOG Resources are all pulling in the reins on new rigs being deployed. According to oil services firm Baker Hughes, which tracks these things, the number of rigs drilling for natural gas in the United States fell to a record 13-year low last week.

That could be an issue for Capstone Turbine, which has been selling its micro-power plants to oil and gas drillers who use the microturbines to power their rigs in remote areas. Capstone has sold more than 150 of its low-emission C65 microturbine units to a customer in the Eagle Ford Shale region in the past nine months, with 30 of them being ordered just this past April. It just sold two of its big C1000 units for an oil and gas customer to use at a remote natural gas facility in Southern California.

Despite the continuing sales of its turbines, the cutback in production is going to weigh on Capstone, though I find that to be a relatively temporary situation. The historically low price that  natural gas commands these days will spur greater demand for it, and will eventually lead to higher prices. In the meantime, Capstone will be positioning itself for those coming boom times.

I've already rated Capstone to outperform the market indexes, agreeing with BrownDirtCowboy that it possesses "superior technology in a growing market." Add your opinion on the Capstone Turbine CAPS page, or in the comments section below, and add its stock to the Fool's free portfolio tracker to see if it can prove the short sellers wrong.

Don't sell yourself short
Share your views with the CAPS community: Squeeze 'em till it hurts, or short 'em till the sun don't shine?

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Fool contributor Rich Duprey holds no position in any company mentioned. Click here to see his holdings and a short bio. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


Read/Post Comments (4) | Recommend This Article (11)

Comments from our Foolish Readers

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 06, 2012, at 11:35 PM, MrSinnister wrote:

    With 1.5Mwhen will Discovery Labs (DSCO) finally get some love ? I mean they have 2 FDA approved products that go into distribution in the 4Q, with the FDA approval coming in March. They only have 43 million outstanding shares, with a current market cap of 125M which nearly multiplies with every 10 cent increase. They are going to distribute a drug for Respiratory Distress Syndrome for infants in the US and European markets, and they have TREMENDOUS upside, already up 60 percent on the year. Add to that two more drugs awaiting approval, Aeroserf, that is in a collaboration with Batelle to get streamlined and fine-tuned and Surfaxin LS, a liquid version of their already FDA-approved drug Surfaxin. How this stock stays in the 2 range is amazingly shortsighted.

    Value of Surf LS + Afectair: 275million

    Shares O/S: 43mil

    Tell me why we can't see $40+/share with DSCO. Note that my sell target is below this, but I expect the stock to soar once it gains momentum. Imagine that liquid surfaxin penetrates the market quickly and gets great reviews by practicing docs (which it should). Surf LS will be even better. And Aerosurf even better after that.

    Facts:

    1. one approved device

    2. one approved drug

    3. $40 million in cash

    4. no debts

    5. no preferred stocks

    6. no impending warrants (outside of the 5yr 5M at 2.80)

    8. exclusive rights

    9. excellent pipeline

    10. Newly partnered (Batelle for R&D)

    11. MAA approval soon

    12. New device new drug launch soon

    13. Mkt Cap 128 million ???

    At 3 times sales, this is already $400 million firm, and that is $10 PPS. DSCO === Hidden Gem.

  • Report this Comment On July 07, 2012, at 9:50 AM, RocketmanL5 wrote:

    Stocks go up; stocks go down. You can make (or lose) money either way. Why hate "the shorts"? As long as you're prepared to cover, I say "Go for it!"

  • Report this Comment On July 07, 2012, at 10:48 AM, patiencepaysoff wrote:

    Get prepared to cover short positions on CPST.

  • Report this Comment On July 08, 2012, at 11:06 AM, paultaut wrote:

    ATPG's field off the Israeli coast:

    Israel 60%, ATPG 40%

    Gazprom wants in, the Israelis will want to retain controlling interest.

    You figure it out. (own and buying the ATPG Pref.)

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