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 for any company, but it could be a red flag from traders that something may be off. 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 Sept. 13 to Sept. 30

Short Shares as a % of Float

ION Geophysical (NYSE: IO  )

191.5%

8.1%

Eni (NYSE: E  )

348%

N/A

Visa (NYSE: V  )

25.9%

2.7%

Source: The Wall Street Journal. N/A = not available.

Adding insult to injury
It hasn't been a great year for ION Geophysical, a developer of seismic software that allows oil and exploration companies to detect fossil fuels underground. In August the company reported second-quarter results that fell about $6.6 million shy of Wall Street's revenue estimates and $0.07 short of earnings-per-share estimates. Now, to add insult to injury, oil production is dropping drastically thanks to the ongoing government shutdown, which could threaten near-term revenue and orders.

Despite the negativity surrounding ION, I see a lot of opportunity in what should be a cluster of short-term issues.

The Obama administration has made no qualms about its desire to reduce the United States' reliance on foreign oil, which means bountiful research and development budgets for big oil. One area where fossil fuels are still being discovered is offshore in the Gulf of Mexico where ION's 3-D seismic technology comes into play.

Another factor working against ION that should be relatively easily to fix has been its integration issues with the purchase of 3-D Marine Systems. Oftentimes the purchasing company will discover that integrated technologies and employees rarely go as smoothly as written on paper. However, that could also mean that beaten-down expectations can be easily surpassed once integration costs fall and are put in the rearview mirror altogether.

With a double-digit growth rate expected next year and a forward P/E of just 12, short-sellers may want to reconsider their short-minded view of ION Geophysical.

Had enough of Eni?
Staying within the oil and gas sector -- this time an integrated company instead of a components supplier -- we have Eni. Like most integrated oil-producers, Eni is fairly inexpensive at just 10 times forward earnings. However, beneath that cash flow lies a tug-of-war between emerging-market promise and political peril.

On the bright side, Eni's appeal comes from its operations in Eastern European and African countries that can grow independently of the largest powers in the world. Eni recently ramped up major asset development projects in Angola, Algeria, and Kazakhstan, which all offer the potential for 5% or higher gross domestic product growth and a reliance on oil and gas discoveries to fuel national GDP. In other words, Eni should see regular cash flow in these regions with little disruption to demand.

Conversely, Eni also operates in politically unstable regions of the world, which can disrupt its refining capabilities and drastically alter its cash flow and earnings power. In 2011, the Libyan uprising was particularly damaging to Eni and the state of Italy since the North African nation accounted for a moderate chunk of daily oil production.

Ultimately, despite Eni's push into North African, and Eastern European, and Asian sectors, it will come down to core European market demand to determine whether Eni's share price advances. Even with impressive moves in emerging markets, I'd have to say austerity measures throughout much of the European Union and political instability are enough to keep me personally gun-shy of Eni moving forward.

Taking a swipe at Visa
You certainly need to have some audacity to bet against payment processing facilitator Visa or its peer MasterCard (NYSE: MA  ) , which haven't seen a downtrend in several years.

What appears to be attracting short-sellers here, outside of a rising valuation, is an ongoing court case that could place a cap on debit card swipe fees. The Federal Reserve earlier this year topped debit card fees at $0.21 per transaction, but a U.S. District Court judge in August moved to suspend the Fed's action. The ensuing battle and multiple lawsuits against Visa and MasterCard could expose both to high near-term costs and potentially cap their profitability from debit-card transactions moving forward.

As for me, I see nothing but continued success for Visa and its peer. Although Visa has more U.S. debit card market share (and thus exposure) than MasterCard, both are doing incredibly well with forging partnerships and expanding their merchant network outside the U.S. Globally, 85% of transactions are still conducted in cash, which gives both companies ample opportunity to see growth for decades to come. With an expected revenue growth rate of 11% next year, $3.35 billion in cash, and a forward P/E of 21, I wouldn't suggest betting against Visa anytime soon.

Foolish roundup
This week's theme is "what can you do for me 10 years from now?" It's difficult to see Visa and ION Geophysical not being global successes given their respective niche operations in payment process facilitation and seismic fossil fuel discovery. I do see Eni thriving in its various emerging markets, but I also feel that weak European demand for oil could easily persist for another three years or longer. As such it may be a company that short-sellers grab hold of for quite some time.

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