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 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 if their worries have merit.

Company

Short Increase March 14 to March 31

Short Shares as a % of Float

Vodafone (NASDAQ: VOD  )

56.6%

0.2%

Cell Therapeutics (NASDAQ: CTIC  )

48.5%

12.3%

Triangle Petroleum (NYSEMKT: TPLM  )

22.8%

16.6%

Source: The Wall Street Journal.

A wall of uncertainty?
Although 0.2% of total float shares held short isn't a huge figure, it's rare that you witness Vodafone's short interest spike by nearly 57% over a two-week period.

The primary source of skepticism is Vodafone's European operations, which make up the bulk of its revenue. Challenging growth conditions in Europe, high unemployment rates, and tough competition -- especially from smaller regional telecoms -- are making life difficult for the telecom service giant. In its latest quarter, which ended Dec. 31, Vodafone reported that revenue fell 3.6% from the previous year as European revenue sunk just shy of 10%. Group service revenue also tumbled nearly 5%. Had emerging markets such as India and South Africa not performed well, it could have been an ugly quarter.

But there's another side to the Vodafone story. Recently, if you recall, Vodafone sold its 45% stake in Verizon Wireless to Verizon for $130 billion. Of that, Vodafone plans to return about $84 billion to shareholders, with $60.2 billion in Verizon stock headed shareholders' way and the remaining $23.9 billion in cash coming as a one-time special dividend. This will leave roughly $35 billion in working capital from the deal for Vodafone to boost network capacity and buy up fiber-optic cable. This will help Vodafone make its network stand out in a highly competitive space.

This cash, while mostly earmarked for capital expenditures, will also increase confidence that Vodafone should be able to pay out 4%-6% yields for at least the next couple of years. We have to keep in mind that even though revenue is down, Vodafone's cash flow remains strong, so its dividend isn't even a remote concern in my mind.

What this will really come down to is whether Vodafone's emerging-market growth can make up for European weakness. I have to think that the auto-sector improvement in Europe suggests that the outlook for telecom service providers will turn for the better as well. While this may still mean tepid overall growth for Vodafone over the next year or two, I believe the company's tighter cost controls, share purchases, and big dividends make it an unappealing short-sale candidate.

Turning over a new leaf
Short-sellers might be acutely aware that betting against any rally in Cell Therapeutics over the years has resulted in big wins.

The biopharmaceutical company until recently was wholly clinical-stage and sports a whopping deficit since inception of $1.9 billion. Skeptics attacked on any rally, as Cell Therapeutics' inability to get multiply relapsed or refractory non-Hodgkin B-cell lymphoma therapy Pixuvri approved in the states, and its propensity to burn cash and issue shares, made it the perfect target.

But is the tide about to turn? Since September 2012 Pixuvri has been approved and launched in a number of European markets. With relatively little competition it stands to reason that Pixuvri will at long last be Cell Therapeutics' first generator of cash flow.

In addition, Cell Therapeutics has a number of late-stage therapies working their way down the pipeline, including pacritinib, a JAK2/FLT3 inhibitor designed to treat genetic mutations linked to myelofibrosis and certain types of leukemia. Cell Therapeutics has partnered with Baxter International (NYSE: BAX  ) , giving Baxter full rights outside the U.S. and splitting commercialization within the U.S. In return, Cell Therapeutics received a $30 million up-front payment from Baxter, along with a $30 million equity investment, and could receive up to $112 million in regulatory and commercial milestone payments.

This sounds dandy, but I'm still going to side with the short-sellers on Cell Therapeutics for one primary reason: Management shows little regard for shareholder value. Cell Therapeutics' management has repeatedly issued shares into every significant rally that I can recall over the past decade. Furthermore, not one, not two, but seven officers and board members sold shares of common stock in March; that included CEO James Bianco, who also sold 520,000 shares and pocketed a nearly $1.7 million in compensation last year. That's hardly a vote of confidence in the company's future or commensurate pay, considering the stock's 99.9% drop over the past decade.

Until I see a significant (and I mean significant) reduction in Cell Therapeutics' losses and a shake-up in its management team, I'd consider this a stock best left for the wolves.

A slippery slope
There's a fine line between an oil and exploration company that has proved assets in the ground and one that can actually recover those assets in a cost-effective and timely manner. Many exploration and production companies have at one point or another come under the guillotine of short-sellers, as they take on debt to expand operations in the hope that their recoveries will handily cover expenses. The next up on that list is small-cap Triangle Petroleum.

Triangle actually reported its fourth-quarter results Wednesday night and gave both optimists and pessimists a bone to chew on. Skeptics will focus on the fact Triangle missed earnings per share by $0.02 and, despite its rapid production growth, only managed to meet Wall Street's revenue expectations.

On the flip side, optimists had a good helping of production data to feed off of, including a 158% increase in revenue, 166% jump in EBITDA, a near-quadrupling in full-year production, and a 175% increase in reserve estimates. Perhaps the greatest advantage for Triangle Petroleum is its prime location in the Three Forks and Bakken shale regions of the Williston Basin. This area is rich with high-grade oil, allowing Triangle to exploit some of the best margins in the industry.

So the big question is which side wins: the skeptic who points to Triangle's $343.2 million in debt and two straight EPS misses, or the optimist who appreciates Triangle's projected growth rate in excess of 30% over the next couple of years? I'd consider passing the torch here to the optimists, primarily because of Triangle's prime real estate. The Bakken affords E&P companies the luxury of selling at the wellhead, then shipping to Cushing, Okla., or even by rail to Louisiana to net the Brent crude price. With a number of options available to Triangle and a reasonable amount of working capital, I believe it can handily outgrow its peers in the region.

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