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 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 31 to Aug. 15
|
Short Shares as a % of Float
|
| Crown Holdings (NYSE: CCK ) |
293.8% |
3.3% |
| Agnico-Eagle Mines (NYSE: AEM ) |
98.5% |
2.5% |
| Yelp (NYSE: YELP ) |
41.5% |
40.5% |
Source: The Wall Street Journal.
Packing it up?
With Crown Holdings having the biggest short percentage increase over the previous 15-day period of any public company, I have to wonder if investors are packing their bags for better packaging plays. Crown, which makes cans for the food and beverage industries, didn't help its cause in July when it reported revenue that fell $90 million short of Wall Street's estimates due to weak demand in Europe. Luckily for shareholders, everyone is affected by European weakness, and Crown appears to be taking the necessary steps to support its valuation.
In an August press release, Crown announced that it was in an agreement with Merrill Lynch to repurchase its shares between August and November. Crown also noted that it had already purchased $200 million, or 5.1 million shares, and would continue to do so based on its closing price. Clearly, European demand will remain a challenge, but assuming it can keep a tight lid on its costs (go ahead and laugh, it's a terrible pun), shareholders should ultimately benefit in the EPS column from a reduction in shares despite tepid organic growth.
Mining for value
Is Agnico-Eagle Mines finally back? It might appear so after the gold miner reported better-than-expected second-quarter results at the end of July.
For the quarter, Agnico's profits went backward by 37%, largely due to higher operating costs and the lack of cost-reducing byproduct materials from its Goldex Mine, which it shut down for good in October 2011 -- but it was still enough to surpass Wall Street's forecasts. In fact, Agnico bumped up its gold production forecast for the first time since it lost about 17% of its production from the Goldex Mine, and forecast that operating costs, while up, will be at the lower end of its previous projections.
Rising mining costs are really inescapable at the moment. One of my personal holdings, Thompson Creek Metals (NYSE: TC ) , has had to seek funding from Royal Gold on two separate occasions to help fund the build-out of its gigantic copper mine, Mt. Milligan. The costs for this project have essentially doubled since it was first announced. The story here is the same across the board and for Agnico-Eagle as well. As long as demand for precious metals remains robust from China -- and there aren't many indications that say it won't -- Agnico could continue to rebound off its lows.
Yelp me, Yelp you!
Lock-ups? We aren't worried about no stinkin' lock-up expirations -- at least that was the voice of Yelp's faithful as the stock rallied dramatically off its lows shortly after its lock-up expiration. Social media companies haven't fared well during lock-up expirations in recent months -- just ask a Facebook (Nasdaq: FB ) shareholder what he or she really thinks about Peter Thiel after he filed to sell 20 million shares of stock -- but Yelp was a notable exception.
That doesn't, however, mean Yelp makes for anything close to a decent long-term investment. There's practically no barrier to entry preventing another company from setting up a review site similar to Yelp's. Yelp is also solely reliant on advertising to drive its growth, and that's a model that put many dot-coms out of business in the early 2000s due to the ebb-and-flow nature of corporate spending. Yelp also charges the highest cost per click to local advertisers per 1,000 impressions of any advertiser, according to VentureBeat. These ad rates are simply not sustainable, and increased competition will drive Yelp's CPC and margins lower over the long term.
Foolish roundup
This week's trend is all about sustainability. Packaging company Crown Holdings and miner Agnico-Eagle may be wounded birds, but they're well on their way to learning to fly again. Yelp, on the other hand, doesn't appear to have a sustainable business model over the long term and looks like it could wind up as minced meat for short-sellers.
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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.
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