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 profits.

These companies recently 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,
Aug. 15

Shares Short,
July 31

% Change

%  Float

CAPS Rating (out of 5)

Facebook (Nasdaq: FB  ) 88.0 61.3 43.5% 17.6% *
NovaGold Resources (AMEX: NG) 27.2 25.7 6% 12.2% ***

Source: 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 stricken by short-term troubles. Only Foolish due diligence will tell you for certain; our 180,000-strong CAPS community offers just such a good place to start.

About face
Notwithstanding one early investment in the Facebook IPO by a Foolish real-money portfolio, I thought there was a pretty good bearish case laid out against its being worth the value the market was assigning the social network. Particularly after it became more widely known that its investment advisors withheld from the IPO roadshow that growth was slowing -- a data point that showed up in its latest quarterly results -- the investment thesis seemed weak for it to be worth the $45 a share it peaked at.

When going public, it seems logical to net as much money as possible. Otherwise, the newly public company has essentially left cash on the table. So I don't fault Facebook and its investment advisors for their excesses, but here we are 57% below its peak, and the shorts are still piling in? I think they've been blinded by the momentum. Even with insiders like Peter Thiel selling a bunch of shares after the lockup period expired -- something Yelp (Nasdaq: YELP  ) investors will go through today just as Zynga (Nasdaq: ZNGA  ) did earlier this year -- I find Facebook below $20 a share an interesting proposition.

Regardless of its troubles, Facebook is the dominant social network site because there really is nothing similar with any kind of base to build on. You update your status there because that's where everyone is. It's not a substantive use of your time, but it's not meant to be; reading pulp fiction isn't meant to replace literary classics, either, yet there is a big market for it.

Revenues grew 32% in the second quarter. That might be slower than previous periods, but it's nothing to sneeze at, either, and its massive user base cannot be easily dismissed. The public launch might have left a sour taste for some, but you'd ignore the social network's latent potential at your own investment peril.

I've had an underperform rating on Facebook on CAPS since the beginning, but I'll be closing out that CAPScall on it and changing it to outperform. Tell me in the comments section below if you think I've made a social faux pas by now siding with the bulls.

Fool's gold?
The promise Facebook holds is golden compared with the tough road NovaGold Resources has before it. As I pointed out earlier this month, the whole reason for the gold miner's existence has evaporated after joint venture partner Barrick Gold  (NYSE: ABX  ) decided to mothball their Donlin Creek project. Barrick says the project no longer makes economic sense, and though perhaps it will in the future (which is why they're still getting the necessary permits), it's not going to move forward on any further development at the moment.

NovaGold had been selling off assets to focus on Donlin Creek, and it had planned to jettison its Galore Creek project as well, though it might back away from that now. Of course even Barrick believes the underlying assets at Donlin are very valuable, and while I've rated NovaGold to underperform the indexes on CAPS for the immediate future, I think the drubbing it's taken could pan out for investors willing to take a longer view of its potential.

Like Facebook, the shorts are essentially suggesting NovaGold has no value, which is a mistake. While the former has better near-term prospects than the latter, and that's the basis for my undeprerform CAPScall, both could handsomely reward patient investors down the road. Tell me in the comments box below if you agree the shorts are being shortsighted with their views and the gold miner has more than a nugget of opportunity before it.

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?

Social-media stocks have turned out to be way less than meets the eye, but for even more on whether they might be worthy of a spot in your portfolio -- or not -- grab yourself a copy of brand-new premium research reports on Zynga and Facebook. You'll also get free quarterly updates as they reports earnings and other developments in their business occur. Sign up for your copy today.

Fool contributor Rich Duprey holds no position in any company mentioned. Check out his holdings and a short bio. The Motley Fool owns shares of Facebook. Motley Fool newsletter services have recommended buying shares of Facebook. We Fools don't 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. The Motley Fool has a disclosure policy.


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  • Report this Comment On August 29, 2012, at 8:05 PM, thegurleys1 wrote:

    "When they zig, you zag!" An old timer shared this with me when we were talking about investing. It seems everyone is "ZIGGING" on Facebook, so I think its time to zag. I understand the reluctance, but we cannot discount their employee base has some of the highest IQs on the planet, it has the largest untapped digital frontier of marketing information and digital real estate. Think of the days when Apple was out of favor in the late 80s, what if you had invested $10,000 then, you would have been worth over $5,000,000 today. Zukerberg has a better foundation now that what Jobs had then! I say, buy it and forget about it!

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