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 condemning 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 July 13 to July 31

Short Shares as a % of Float

DigitalGlobe (NYSE: DGI  ) 244.6% 9.9%
Cal Dive International (NYSE: DVR  ) 74.8% 15.4%
Total (NYSE: TOT  ) 142.6% 0.3%

Source: The Wall Street Journal.

I see you!
One easy way to draw the ire of short-sellers, other than listing off 50 reasons why it's very easy to be a pessimist in the current economic environment, is to list the United States government and its agencies as your primary customer.

DigitalGlobe, whose satellite imagery equipment provides some of the images you'll find on Google Maps as well as services for U.S. agencies, has been piled on by pessimists who anticipate that neither the Democrats nor Republicans can come to a consensus in terms of how to reduce the deficit per the August 2011 debt ceiling agreement. If no consensus is reached, sweeping cuts are expected in the defense sector, which would most definitely include DigitalGlobe's business.

DigitalGlobe isn't sitting on its laurels, though, and is making consistent strides to better shareholder value. For one, DigitalGlobe turned the tables on its former suitor, GeoEye (Nasdaq: GEOY  ) , and agreed to purchase the company for $453 million in cash and stock. The combined company will be the nation's largest commercial satellite imagery products provider and the cost synergies should help drive down costs enough to negate any lost orders from the U.S. government. Also, DigitalGlobe was no slouch in its recent quarter, boosting revenue growth guidance to 16% from its previous estimate of 14%. Despite the political headwinds DigitalGlobe could face, the soon-to-be combined entity looks too strong to bet against.

A pipe dream?
The Deepwater Horizon oil spill in 2010 was absolutely the worst thing that could happen to Cal Dive International, an oil services company that deals with underwater pipe laying and platform installation in the Gulf of Mexico. It was widely expected that Cal Dive's earnings would be affected by the temporary drilling moratorium. But, it was also expected that once drilling permits began being handed out again, that profits would pick back up.

Things haven't worked out exactly as planned for Cal Dive. Heavy competition in the Gulf is negatively impacting its pricing power and poor weather conditions (i.e., Tropical Storm Debby) ate into margins in its recent quarter. A continued string of losses might be understandable if rig utilization rates were weak in the Gulf of Mexico, but that's not what we've been hearing from exploration and production companies in the region. Since 2008, Cal Dive's revenue has been halved, and it hasn't been profitable on an annual basis since 2009. Until it can return to regular profitability, I see the short-sellers having a field day here.

Oil is thicker than reason
International oil and gas company Total isn't the type of company that garners much short interest (just 0.3% of outstanding shares), but a 143% spike in short interest is bound to turn some heads.

Total's second-quarter results, released in late July, weren't fantastic, but they were far from the disaster that short-sellers were forecasting. We knew that lower realized selling prices for Brent crude would be a drag on earnings, but it was the company's leak at its Elgin complex in the North Sea that was the big question mark. Overall, hydrocarbon production decreased by just 2%, allaying many fears.

Total actually has a lot going for it at the moment.

  • It's expanding its investments in natural gas liquids in Australia.
  • It has a sizable investment in SunPower (Nasdaq: SPWR  ) , the lone solar products company I approve of that also passed the rigorous debate team of Travis Hoium, Alex Planes, and myself.
  • It's been raising its dividend.

Really, what's not to like here? Total will have European woes to contend with (what major oil and gas company doesn't right now?), but it's yielding nearly 5% and is actually cheaper on a forward earnings basis than ExxonMobil or Chevron. Short-sellers, beware!

Foolish roundup
This week it's all about cutting costs and controlling pricing power. DigitalGlobe and Total seem to be working toward maximizing margins and shareholder value while Cal Dive continues to falter.

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 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.

And 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 ExxonMobil, Google, and Costco. Motley Fool newsletter services have recommended buying shares of GeoEye, Total, Google, Chevron, and Costco. 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 August 22, 2012, at 8:25 PM, ncfool wrote:

    Er, I'm pretty sure the increased short interest in DGI is entirely due to arbitrage activity WRT DGI's proposed acquistion of GEOY. A "risk arb" would go long GEOY and short an equivalent number of shares of DGI, to "lock in" as profit the discount on the proposed deal. (The only 'risk' is if the deal busts or the terms are changed prior to completion of the transaction.)

    At today's (8/22) closing prices, the discount vis-a-vis an all stock deal is ~ 9.6%. If you assume the deal closes in late 2012, this is an annualized return of ~ 28.8%. Even if it doesn't close until the end of Q1 2013, this is still a 16.5% annualized return -- not too shabby in today''s market.

    The above is based on the all-stock exchange rate of 1.425 shares of DGI for each GEOY share and closing prices (today) of $26.34 for GEOY and $20.26 for DGI. Do the math.

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