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 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.

Source: The Wall Street Journal.

Banking on life's necessities
Just as we at The Motley Fool are banking on life's necessities by trying to bring clean water to as many people as possible with our Foolanthropic Charity: Water campaign, betting against a water and wastewater servicer like American Water Works, which is relatively impervious to economic fluctuations, probably isn't going to be a smart move.

American Water, which is a favorite necessity play of mine, released third-quarter results in early November that were stronger than expected. Revenue improved 9% year over year while net income jumped 20% as everything from higher pricing to cost savings from improving its IT software have helped American Water turn in stronger growth.  

For a utility paying out a clean 2.7% yield, it's not unreasonable to suspect that with dividend taxes possibly headed higher due to the fiscal cliff, short-sellers are piling into the stock. But is this a smart long-term strategy? Probably not. American Water's dividend is extremely safe and likely to grow, just as its water business commands incredible pricing power and is mostly immune to economic fluctuations.

This stock has the power
Short-sellers must have received the memo to begin attacking all of the steadiest-paying utility companies, and you can chalk up Michigan's DTE Energy to the list as well.

Serving 3.3 million customers, DTE's electric, natural gas, and other businesses are well diversified enough, and its yield of 4.1% enticing enough, that short-sellers should know better than to be betting against a company like this. In DTE's most recent quarter, it reported a 22% increase in year-over-year profits even as revenue declined 3% over the previous year due to warmer weather. This big growth driver was a combination of cost cuts and considerably better performances from its electric and natural gas utility segments.  

Like American Water Works, DTE Energy is pretty much shielded from the effects of the fiscal cliff and an economic downturn. Consumers may choose to hold back a tad on how high they set the thermostat this winter, but electricity is a basic homeowner necessity. If short-sellers are thinking DTE will be hit because of a possible boost in dividend taxes, they may have another thing coming!

Stocking stuffer
Shareholders in TJX, the owner of T.J. Maxx and Marshalls, have little to be concerned about with regard to the fiscal cliff at the moment, as investors seem more concerned with immediate holiday sales and the fact that U.S. retail same-store sales missed the mark in November.

November saw the majority of retailers struggle to meet Wall Street estimates because of the effects of Superstorm Sandy. Department store Macy's (M 1.44%), which sells similar styles to those that TJX offers, but at a higher price point, produced a 0.7% same-store sales decline, while Target (TGT -0.36%), which has addressed adding discounted designer brands to its stores, saw same-store sales decline 1%.

TJX shareholders have a lot less to worry about, as the discount designer retailer reported same-store sales growth of 3% over the previous year as customer traffic drove results higher. Furthermore, TJX boosted its same-store sales guidance for December to a range of 5%-6% from a previous forecast of 4%-5% growth. Given the consistent mid-single-digit same-store sales growth TJX has produced for years, it's clear that its management team understands what its customers want -- and that's more than half the battle in the retail world!

Foolish roundup
The theme of this week is that if you're betting against consistent performers of life-necessity stocks because of a possible rise in dividend taxes, you may be in for a big (and unwelcome) surprise come January!

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.