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.
Short % Increase Aug. 15 to Aug. 31
Short Shares as a % of Float
|Barrick Gold (NYSE: ABX )||50.5%||0.7%|
|Beazer Homes (NYSE: BZH )||29.4%||24.3%|
|AOL (NYSE: AOL )||31.5%||15.3%|
Source: The Wall Street Journal.
Follow the yellow brick road
For those investors betting that this would finally be the year that gold prices decline after a decade-long run, Mario Draghi and the Federal Reserve may have just crushed your hopes and dreams yet again. The European Central Bank's plan to buy member nations' bonds to improve liquidity and drive down yields in exchange for obtaining financial oversights, and the Fed's commitment to purchase $40 billion worth of mortgage-backed securities each month for as long as needed has lit a fire under the mining sector that doesn't look like it can be stopped.
Barrick Gold has had numerous issues recently, including rapidly rising mining costs (including fuel, labor, and equipment) as well as asset writedowns. However, the recent rally in gold could be the impetus that gets Barrick, and the gold mining sector, back on track following years of underperforming the underlying yellow metal. With its dividend tied to its cash flow, a higher gold price should also mean more money in shareholders' pockets. Its current yield of 1.9% may not be much to write home about, but that figure is likely to head higher. In short (pun intended), I wouldn't be betting against Barrick Gold here.
Throw away the key
The rebound in the housing sector continues to defy my expectations by ticking modestly higher, with many homebuilders reporting higher orders and firming prices. One company that I'd consider worst of breed in the sector, though, is Beazer Homes.
Beazer's second-quarter report highlighted a 28% increase in new home orders, and the company announced that it refinanced some of its debt, which should save the company $15 million annually. However, cancellation rates are still notoriously high at 24.5% and the company is projected to lose money well into 2014, if not beyond. Homebuilding margins also fell 60 basis points over last year to 10.5%. Lennar (NYSE: LEN ) , another homebuilder I'm not particularly fond of, primarily due to macroeconomic issues, has homebuilding margins that are more than double Beazer's at 22.5%.
So if you twisted my arm and asked me if I felt short-sellers had reasons to be skeptical of Beazer, I'd whole-heartedly say, "YES!"
So nice, you can't do it twice
If you told me one year ago that AOL would triple over the next 12 months, I probably would have fallen out of my chair laughing. But here we are 12 months later and AOL has tripled. Boosting the stock higher was a massive one-time sale of 800 patents to Microsoft (Nasdaq: MSFT ) for $1.1 billion, which the company has vowed to redistribute to shareholders. I applaud CEO Tim Armstrong for unlocking value for shareholders, but let's see him doing it again!
The AOL business is still in shambles. Revenue in its most recent quarter fell 2% to $531 million as its display advertising, the bread-and-butter of its business, remained weak. Part of that has to do with tepid advertising spending in a slowing U.S. economy, but the other side of this story is that AOL stopped being a premier stop for Internet surfers in the mid-2000s. The company purchased Huffington Post in order to try to regain some of its pizzazz, but I'm not sure it ever will. I foresee short-sellers having a field day with AOL in 2013 once the euphoria of this onetime gain is gone.
This week's theme is: Show me the consistency! Barrick Gold has had its fair share of issues, but with gold prices rising for more than a decade, it continues to deliver remarkably consistent results. Beazer and AOL, on the other hand, can't find their way out of a paper bag and are headed higher because of sectorwide strength or onetime gains, and not consistent bottom-line results.
Will Microsoft's patent purchase from AOL usher in a new avenue of growth for the company? Find out the answer to this question and much more in our latest premium research report on Microsoft. Crammed with in-depth and unbiased analysis on the opportunities and threats facing Microsoft, and complete with a year's worth of regular updates, this report will give you the knowledge needed to make smart long-term investing decisions on Microsoft. Click here to get your copy.
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.