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Shorts Are Piling Into These Stocks. Should You Be Worried?

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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 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 if their worry has some merit.


Short Increase Oct. 31 to Nov. 15

Short Shares as a % of Float

Generac Holdings (NYSE: GNRC  )



Teradata (NYSE: TDC  )



Baxter International (NYSE: BAX  )



Source: The Wall Street Journal.

Powering down?
Natural disasters like hurricanes, superstorms, and earthquakes are normally reason for corporations to point the blame elsewhere as to why their results were weaker than normal. For Generac Holdings, a manufacturer of personal-use generators, it's a welcome sign.

Not to make light of the slew of recent disasters, but Generac's standby generator sales have soared and it's likely they could continue to grow by double digits in the immediate future as consumers don't want to be caught on the wrong end of the aisle when the next disaster hits. Generac holds the lion's share of the consumer market, but it has a very limited imprint in the industrial and commercial market, where peers like Caterpillar (NYSE: CAT  ) and Briggs & Stratton (NYSE: BGG  ) dominate. If I were a Generac shareholder, Caterpillar would be my biggest concern, as its generators are capable of running on multiple fuel sources -- including non-conventional fuels.

Even with Generac's huge pop following Superstorm Sandy, I wouldn't consider betting against the stock. The long-term outlook for consumer standby generators looks strong, and the only aspect really missing from making Generac an all-star stock is a consistent quarterly dividend.

An unsolvable equation
Analytic data solutions company Teradata is effectively living in the "bizarro world" described so laughably in Seinfeld. Whereas software and hardware companies are having grandiose issues growing in Europe and seeing slowdowns in Asia, Teradata's latest quarterly report demonstrated 28% growth on a constant-currency basis in Europe, 16% on a constant-currency basis in Asia, and a pitiful 2% in the United States.

At first glance this might appear to be the perfect formula for success (growth overseas while the domestic market becomes saturated with your products), but this isn't 2007 anymore! The U.S. still represents slightly more than half of Teradata's total revenue, therefore a slowdown in spending due to health care reforms from the Affordable Care Act and a dip in corporate spending because of the looming fiscal cliff could be enough to really put a dent in Teradata's near-term orders. Not to mention that negative currency translation is hindering Teradata's bottom-line profits.

Although I do tend to favor Teradata over the long term, in the very short term (two to four quarters) I feel short-sellers could gain the upper hand.

The Affordable Care kick in the derriere
Medical equipment supplier Baxter International has been bracing for the past two years for certain aspects of the Affordable Care Act, including the 2.3% medical device excise tax, which are due to go into effect next year. Baxter, rather than focusing on growing a sluggish medical device business, has instead turned to the acquisition front to push profits higher.

According to research firm Zacks, Baxter's cash outflows due to acquisition ramped up from $319 million in 2010 to $590 million in 2011. Last week, Baxter announced that it would be purchasing Swedish-based dialysis products provider Gambro for $2.8 billion ($4 billion with debt included), marking its largest purchase yet. Baxter expects $300 million in synergy savings from the deal.

While I'm all for Baxter boosting its presence in specialized markets, I have to say that negative currency effects, tepid spending abroad, and sluggish growth in devices in light of the ACA are reason to be cautious over the near term. Covidien (NYSE: COV  ) , one of Baxter's primary rivals, recorded a 3% drop in fourth-quarter revenue last month, and currency translation losses accounted for all 3% of that drop. Even without the negative effects of currency, it's plain to see that device makers are struggling to find avenues of growth at the moment. With that said, I'm not ready to call short-sellers in charge at the moment, but I can fully understand their reasons to be skeptical about Baxter heading higher.

Foolish roundup
This week's theme was all about whether or not these companies can overcome the slowdown in corporate and consumer spending expected with the fiscal cliff and the ACA. While all three look like winners over the very long term, only Generac gets my full endorsement in the interim.

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.

Caterpillar is the market share leader in an industry in which size matters, and its quality products, extensive service network, and unparalleled brand strength combine to give it solid competitive advantages. Read all about Caterpillar's strengths and weaknesses in our brand-new report. Just click here to access it now.

Read/Post Comments (1) | Recommend This Article (5)

Comments from our Foolish Readers

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 December 10, 2012, at 8:29 PM, olbar wrote:

    WOW!. Those shorts are idiots!

    I am gonna buy more BAX.

    As a medical professional I am familiar with Baxter products from everyday use in hospitals throughout North America. And now GAMBRO! This is amazing Swedish medtech company manufactures dialysis and anesthesia equipment. It dominates market in Northern, Eastern Europe and Russia.

    I am ecstatic about this acquisition and that some idiots have no idea about medtech market.

    Way to go to 100$ BAX!

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Sean Williams

A Fool since 2010, and a graduate from UC San Diego with a B.A. in Economics, Sean specializes in the healthcare sector and investment planning. You'll often find him writing about Obamacare, marijuana, drug and device development, Social Security, taxes, retirement issues and general macroeconomic topics of interest.

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