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 number of shares sold short and see whether traders are blowing smoke or if their worry has some merit.

Company

Short Increase Jan. 31 to Feb. 15

Short Shares as a % of Float

Exelon (NYSE: EXC  )

69.1%

2.1%

Manulife Financial (NYSE: MFC  )

84.7%

0.6%

Hess (NYSE: HES  )

69.5%

6.3%

Source: The Wall Street Journal .

Captain, we need more power!
It's been a rough ride for Exelon shareholders, who have seen their holdings reduced by roughly two-thirds since mid-2008. A combination of the biggest recession to hit the country in 70 years coupled with a rapid deterioration in alternative energy fuel costs have put Exelon at a marked disadvantage.

Nuclear energy, for which Exelon is the largest supplier in the U.S., is pricier than any other form of energy, although rising natural gas prices and stabilizing coal prices in recent months are making that comparison a bit less stark. The key takeaway as to whether you think Exelon is a bloated pig or an amazing value has to do with its ability to generate demand for nuclear energy and if it can level the playing field by utilizing alternative energies of its own. To both fronts I'd say Exelon has a good shot at success.

In terms of alternative energy, Exelon is already working to actively boost its solar and wind production capacity, including a solar-farm project signed with First Solar (NASDAQ: FSLR  ) in Maryland. Alternative energy projects like this cost a lot upfront, but their long-term effect is financially beneficial for shareholders, energy customers, and the environment.  

I suspect Exelon will get its nuclear gap bridged sooner than later as President Obama's U.S. energy independence initiatives will supply the nuclear industry with much-needed subsidies to keep building. If nuclear power, which is another form of clean energy, can receive a governmental boost, then Exelon should have no problem competing against low natural gas prices.

I'll gladly pay you Tuesday for a higher Treasury yield today!
Short sellers in the life insurance and financial protection sector may want to double-think their positions after that considerably better-than-expected jobs report on Friday.

The Bureau of Labor Statistics noted that 246,000 private sector jobs were added last month, lowering the unemployment rate to a four-year low at 7.7% and causing the 10-Year Treasury yield to hit an 11-month high. The reason this is so meaningful for life insurance companies such as Manulife and MetLife (NYSE: MET  ) , which turned in one of the top performances in the S&P 500 on Friday, is that they hold a significant portion of their investments in U.S. Treasuries. MetLife owns $370 billion in bonds according to Bloomberg, and higher yields will certainly boost their profits quicker than anyone is expecting.

It's also worth noting that because earnings growth for these life insurers has been tempered by low bond rates for an extended period of time, there are some exceptionally attractive valuations within the sector. Manulife and MetLife are valued at less than 10 and seven times forward earnings, which leaves plenty of room for further upside assuming bond yield expansion continues.

Oil is thicker than short sellers
Beware, short sellers. The diversified oil and gas industry has spin-off fever and you're about to be caught up in the mix.

Just last week, Hess announced more details that show its intent to follow in the footsteps of Marathon Oil and ConocoPhillips by splitting its midstream and downstream operations from its upstream operations. In late January, Hess announced that it would be selling off its storage terminal network and planned to exit the refining business completely. On Monday (last week), it confirmed this intent by outlining its plans to exit the energy trading and marketing business, and selling its gas stations. It anticipates spinning off this separate company before the end of 2014 and will be doubling its dividend to shareholders to $1 annually.

Before you jump on the "Short it now" bandwagon, consider the success of both Marathon and Conoco since their spinoff. Both are up significantly and this has to do with investors being able to get better earnings visibility from each side of the business, making the entire sector a dangerous shorting opportunity. If short sellers were wise, they'd avoid Hess completely.

Foolish roundup
Sometimes the short sellers can't win for trying, and this was one such week. A trend toward energy independence, rising Treasury yields, and better earnings visibility are the factors that make these three companies attractive investments.

What's your take on these three stocks? Do short sellers have these stocks pegged or are they blowing smoke? Share your thoughts in the comments section below.

Is this the best deal in the energy sector?
As the nation moves increasingly toward clean energy, Exelon is perfectly positioned to capitalize on having the largest nuclear fleet in North America. Combine this strength with an increased focus on renewable energy, and EXC's recent merger with Constellation places Exelon and its best-in-class dividend on a short list of top utilities. To determine if Exelon is a good long-term fit for your portfolio, you're invited to check out The Motley Fool's premium research report on the company. Simply click here now for instant access.


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  • Report this Comment On March 12, 2013, at 9:22 AM, TigerPack1 wrote:

    Keep up the good work!

    Hess is a $100 stock on the Middle East driven spike in oil coming,

  • Report this Comment On March 12, 2013, at 9:24 AM, TigerPack1 wrote:

    When FSLR announces a partnership with SPWR and others to build and install "outside" manufactured panels on solar farms run by them, it will rocket to $50.

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