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

Do short-sellers have these three stocks pegged? You be the judge!

Mar 24, 2014 at 5:05PM

The best thing about the stock market is that you can make money in either direction. Historically, stock indexes tend to trend upward 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, between 1983 and 2006, even with dividends included, 64% of stocks underperformed the Russell 3000, a broad-scope market index.

A large influx of short-sellers isn't a condemning factor for any company, but it could be a red flag indicating that something is off. Let's look at three companies that have seen rapid increases in the number of shares sold short and see whether traders are blowing smoke or their worries have merit.

Company

Short Increase Feb. 14 to Feb. 28

Short Shares as a % of Float

Brookdale Senior Living (NYSE:BKD)

75.8%

5.4%

U.S. Steel (NYSE:X)

20.8%

25.8%

Eldorado Gold (NYSE:EGO)

48.2%

1.2%

Source: The Wall Street Journal.

Two heads are better than one
Based on the recent upward move in senior living facility provider Brookdale Senior Living, Wall Street seems quite pleased with its $1.4 billion acquisition announcement of rival Emeritus (NYSE:ESC) last month. The deal, which also involves the assumption of $1.4 billion of Emeritus' debt, will help create a senior living company with 1,161 locations and representation in 46 of 50 states, which will control 10% of the senior housing market

Still, not everyone is a fan of the deal -- and for good reason. The Centers for Medicare and Medicaid Services has made it clear that long-term Medicare reimbursement rates are going to fall as the government looks to pare back businesses' reliance on government-sponsored plans to boost their bottom lines. For senior housing companies this means they'll need an influx of self-sufficient payers, or they could find it very difficult to grow their business organically throughout the remainder of the decade.

The good news here, though, is that the combination of Brookdale and Emeritus should result in a number of cost synergies as well as a $0.40 bump in EPS for Brookdale by the third year following the merger. It could also signal a wave of consolidation in the senior housing sector, as larger companies are going to be able to manage their costs better and have a more visible national presence.

I view the merger as a significant profit-booster and cost-saver for Brookdale, but I'm concerned that its current valuation may not properly reflect Medicare cut risks moving forward -- especially with Brookdale currently valued at 68 times forward earnings. Short-sellers may have a decent shot at being right over the short-term, but they may be steamrolled over the long run.

Steel of a deal?
Few battles between optimists and pessimists have raged on for a longer period of time in the industrials sector than that of steelmaker U.S. Steel, which still sports one of the highest short ratios within the S&P 500.

The bull case for U.S. Steel is that global steel prices are at or nearing a trough, which should bode well for steel manufacturers moving forward. U.S. Steel has undertaken aggressive cost-cutting measures, including idling and closing some of its production facilities in order to reduce global output and improve pricing. In addition, with U.S. Steel expected to be profitable for the first time in six years this year, investors believe that the forward valuation of 12 times earnings is simply too cheap to pass up once steel prices do begin to rise.

On the other hand, skeptics would point to the fact that while steel demand and pricing is improving in the United States, it's still very much up in the air for China and other emerging markets. It's quite possible that international steel producers might view the uptick in the U.S. as a reason to again flood the market with supply, which could work against U.S. Steel's margins. Finally, U.S. Steel's net debt of $3.3 billion makes strategic moves difficult to execute and could compromise its ability to boost its dividend in any meaningful way even if its operations dramatically turn around.

Overall, I land among the skeptics on U.S. Steel. While it's clear that the company is benefiting from strict cost management, the potential for steelmakers to flood the market with supply and China's erratic growth prospects keep me hesitant on the sector as a whole. With U.S. Steel rallying strongly in 2013 I'd suggest that improved expectations are already baked into its share price.

Hardly losing its luster
Lastly we have gold miner Eldorado Gold, which has drawn a 48% increase in short shares over the past two weeks of February as gold prices rebounded aggressively on geopolitical tensions in Crimea between Russia and Ukraine.

Short-sellers remain bearish on gold given that U.S. inflation remains tame and the need to pump liquidity into the U.S. economy via QE3 is beginning to taper down. With less chance of inflation on the horizon and the global economy remaining on the mend, the upside prospect for gold appears limited to skeptics.

However, Eldorado also offers some clear advantages that appear to put it above your average gold miner. For starters you get incredible geographic diversification, with mining operations in Turkey, China, Greece, Brazil, and Romania. All of these countries offer favorable labor expenses for Eldorado which help keep its costs down. Most importantly, Eldorado's costs are among the best in the industry, with total cash costs per ounce dipping $3 to $551/oz. in 2013 and all-in sustaining costs expected to be in the range of $915/oz.-$985/oz. in the upcoming year. In other words, it would take a steep drop in gold prices to really impact Eldorado's cash flow. 

While I do agree with pessimists that certain headwinds do exist for gold, Eldorado's improving production prospects and impressive cash cost controls make it an attractively priced gold-miner in my eyes.

Short-sellers would be wise to keep their distance from this top stock in 2014
There's a huge difference between a good stock and a stock that can make you rich. The Motley Fool's chief investment officer has selected his No. 1 stock for 2014, and it's one of those stocks that could make you rich. You can find out which stock it is in the special free report "The Motley Fool's Top Stock for 2014." Just click here to access the report and find out the name of this under-the-radar company.

Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

The Motley Fool has no position in any companies mentioned in this article. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers