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.

Company

Short Increase Dec. 14 to Dec. 31

Short Shares as a % of Float

IntercontinentalExchange (NYSE: ICE  )

525.3%

6.4%

Stanley Black & Decker (NYSE: SWK  )

67.6%

7.6%

Seabridge Gold (NYSE: SA  )

62.5%

16.3%

Source: The Wall Street Journal.

Cool as ICE
Shares of commodity and futures-based contract trading facilitator IntercontinentalExchange, or ICE, have jumped around pretty wildly since it reported that it'd be purchasing NYSE Euronext (UNKNOWN: NYX.DL  ) , owner of the New York Stock Exchange, for $8.2 billion on Dec. 20. Following a similar failed deal by the Deutsche Boerse, the ICE deal makes a lot of sense on paper. It'll allow for better competition with CME Group in the U.S., and there's very little overlap in operations between the NYSE Euronext and ICE's current operations -- especially if it sells or spins off the Euronext portion of the business.

Keep in mind, though, that there are multiple cost-cuts and integration costs that have yet to be factored in by shareholders. Although I usually discourage paying too much heed to analyst comments, Macquarie Group analyst, Edward Ditmire hit the nail on the head when he opined last week that we're looking at a 2014-2015 growth story, but could see revenue growth slow in NYSE's traditional businesses in the meantime. Growth in ICE's energy and commodity business continue to be the most attractive investable aspects of ICE, and I sure do like the buyout on paper, but Ditmire appears correct in his skeptical opinion that ICE shares may ease lower in 2013.

Measure twice, cut once
Sometimes I seriously wonder if short-sellers and I are looking at the same company! With the housing market rebounding, I'd just as soon avoid direct exposure to builders and focus on areas that will benefit in both remodeling and new construction environments... like tools from Stanley Black & Decker.

Three weeks ago I featured Stanley Black & Decker as a dividend company you could buy right now for a number of reasons. To begin with, it's spending aggressively -- about $100 million through 2015 -- to boost emerging-market sales from current levels, 14% of total sales, to 20% by 2015, and perhaps as high as 30% by 2020. Second, the company is keeping a tight lid on costs and is beginning to realize major cost synergies from its Black & Decker and Stanley Works merger. Finally, the company is putting acquisitions on the back burner for now and focusing on improving organic growth. My heart be still; a company that'll actually work on its existing operations!

As I also noted in my praise for Stanley Black & Decker, it's paid a dividend for an astounding 136 consecutive years and has boosted its annual payout by an average of 8% annually for the past 45 years. I have to ask again: "Short-sellers, are we looking at the same company?"

Treated like royalty, or a royal pain?
Investing in the biotech sector can be an irritating process sometimes because even when the data is there, the FDA doesn't always agree because of a myriad of extenuating factors. The same can be said of gold miners that are in the exploratory stage of their existence.

Seabridge Gold has been preparing its KSM project for commercial production for years, but it must first complete all the required feasibility studies before it can apply for all appropriate licensing. In May, we received an incredibly optimistic preliminary feasibility study that estimated the mine could run for 55 years and, including by-product credits, reduce cash operating costs to just $148 per ounce. In addition, Royal Gold (NASDAQ: RGLD  ) has made two separate investments in KSM's net smelter royalties for all gold and silver produced in exchange for cash.

However, without any current production, exploratory companies like Seabridge are at the mercy of the price of gold, which has frankly been in a holding pattern in recent weeks. In order for Seabridge to head higher, it'll need to actually make good on its word to move forward with its plan to build out KSM, and it'll need a boost in underlying gold prices.

Foolish roundup
This week it's all about taking a step back from the minute and looking at the big picture. For all three companies, I'd say the long-term forecast appears bright, but short-term headwinds in ICE's and Seabridge's cases could cause shares to come under pressure in 2013.

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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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 January 26, 2013, at 8:30 PM, terryongarland wrote:

    Seabridge has no intention of building KSM.They have zero aspiration, nor the ability to be a miner. They intend to sell or JV a deal to a miner.

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