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 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 Aug. 15 to Aug. 31

Short Shares as a % of Float

Aetna (NYSE: AET  ) 158.2% 1.7%
Cliffs Natural Resources (NYSE: CLF  ) 36.1% 15.3%
Millennial Media (NYSE: MM  ) 36.3% 25.3%

Source: The Wall Street Journal.

Take a hike
Just in case you were curious who's in charge of health care HMO rate hikes, it's the HMO providers. In spite of the Affordable Care Act, which will set up checks and balances that require HMOs to disclose their reasoning behind excessive price hikes and allow consumers to make more informed health care decisions, Aetna continues to show us that policy pricing ultimately lies with the HMOs. Aetna continues to raise prices as much as 21% in some states, with little in return for its actions.

Perhaps the real reason for the spike in short interest -- the highest over this two-week period, may I add, of any major company in percentage terms -- has to do with its $5.7 billion purchase of Coventry Health Care (NYSE: CVH  ) in August at a 20% premium. The move will give Aetna greater exposure to government-financed health care, Medicare, and Medicaid, but it could come with integration hiccups -- a primary reason that short-sellers could be betting against Aetna. However, at just seven times forward earnings and with unyielding pricing power, let's just say this isn't a company I'd consider betting against.

Stick it in your stocking
Coal might be the scourge of environmental groups worldwide, and it's the odd energy producer out when it comes to where electric utilities would like to take their energy production in the future, but in the meantime it's still a big part of the U.S., China, and India growth picture.

Cliffs Natural Resources has rebounded in a big way off its lows following news from China that the nation would implement a $156 billion infrastructure plan that would involve large steel projects. As one of the world's largest iron ore producers, and with metallurgical coal assets (used to strengthen steel), Cliffs could be in line for a nice boost to its bottom line. Cliffs Natural also boasts one of the industry's healthiest dividends at 6.2%. Needless to say, while coal's outlook is anything but pristine, and iron ore demand may only tick up slightly, the value in Cliffs Natural seems too attractive to ignore.

There's an ad for that
The plain-as-day exodus of enterprises from print advertising to online and now mobile advertising is without question the worst hidden secret on Wall Street. Millennial Media is one of those companies that stand to benefit in a big way once a company (any company!) gets a mobile platform up that just makes sense.

As of right now, Twitter generates more from mobile advertising than Facebook (Nasdaq: FB  ) , despite Facebook's CEO Mark Zuckerberg stating over and over that his company is a mobile-based company. There's a wide moat of mobile possibilities, with Facebook's 102 million mobile-only users as a largely untapped resource. Then again, with advertisers seeing such poor click-through on Facebook, it may take more than just a Facebook revolution to drive mobile sales.

On paper, Millennial's business plan makes sense, but until the company begins turning a profit on a regular basis, I can understand short-sellers' skepticism.

Foolish roundup
Not to beat a dead horse, but short-sellers are looking pretty near-sighted with this week's choices. Sure, Aetna may have integration issues with Coventry. Yes, Cliffs Natural's met-coal prices are unlikely to bounce in a meaningful way immediately. And admittedly, it's going to take time for Millennial Media to be regularly profitable. But the long-term business plan for all three companies makes sense, and results from all three companies back up this long-term thesis of mine.

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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.

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 Facebook. Motley Fool newsletter services have recommended buying shares of Coventry Health Care and Facebook. 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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  • Report this Comment On September 17, 2012, at 11:56 AM, rhealth wrote:

    MM has gone up and down very sharply since it's IPO and will very likely continue to do so. Short sellers interested in this one would be better off in Vegas (or RIMM).

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