Do the Shorts Know Something You Don't?

Since everyone loves a winner, it's reasonable to assume that everyone hates a loser -- everyone but short-sellers, at least. These contrarian investors bet that hot stocks are primed to fall, aiming to turn their pessimism into profits.

In the chart below are three companies with top percentage increases of shares short. Combining that with the collective intelligence of Motley Fool CAPS, we'll see which of these companies Fools believe have the power to make short work of short-sellers.

Sources: wsj.com. Share counts in millions.

Of course, this isn't a list of stocks to buy -- or short! These stocks could have serious problems that warrant their short interest, but they might also be stricken by short-term troubles. Only Foolish due diligence will tell you for certain; our 170,000-strong CAPS community offers just such a good place to start.

The short list
With gold trading north of $1,560 an ounce, miner Nevsun -- with a single mine in war-torn Eritrea (located across the Red Sea from Saudi Arabia and Yemen) -- is finding the venture profitable so far. It finally began commercial production in February at the Bisha project and recently increased its mineable reserves there by 40%. That's resulted in an extended mine life of 13 years.

While setting up shop in Africa carries risk, small oil companies like Vaalco Energy and Hyperdynamics (NYSE: HDY), for example, have been attempting to make a go of it even though the short sharks have been circling and there are gold miners aplenty on the continent. Gold Fields recently consolidated its holdings of two Ghana mines when it bought out midtier gold miner IAMGOLD's (NYSE: IAG) 18.9% stake in the West African projects.

CAPS member perezrp101 was expecting Nevsun's drilling to report better results, and says it will soon add copper to the mix:

in 2011, subject to drill results, the Company expects a second increase to Bisha's resource and reserves by including results from the Hangingwall Copper and its infill deep drilling at Bisha Main.

Nevsun has indicated that it expects to start the copper production phase of the mine in 2013. You can dig into the company now on the Nevsun Resources CAPS page and let us know whether you think it's fit enough to succeed.

No small thing
Easier to understand is why American Apparel appears on this list. Although its stock sits twice as high as it did at the start of last month, the risk of a complete collapse remains very high for the apparel maker. As I noted last week when the stock sharply corrected its course, American Apparel is a rudderless ship swamped in internal crises and financial woes. That a group of private equity firms decided to prop up the company with a cash infusion simply underscores the dire nature of the situation. Is American Apparel going to get its financial house in order?

Apparently one member of the investor group previously bailed out Jamba (Nasdaq: JMBA) in 2009, a move that seems to have saved the company. And American Apparel's bank is insisting on having an executive from FTI Consulting oversee an additional $5 million cash balance that the company will be required to keep on hand.

For CAPS member Shankapotamus, that's not going to help this heavily indebted company. Add it to your watchlist to see whether it can still thread the needle of growth.

Squeezed to death
If you want to bet on China's economy helping to support the oil and gas industry, that's one reason you might want to invest in China GengSheng Minerals, but this stock moves more in tune with prognostications made for the rare-earth elements market.

China GengSheng saw a 22% jump in revenues in the fourth quarter as sales of proppants more than tripled. Proppants are small beads or grains of sand that are hydraulically pumped into a fissure in the ground to prop it open and allow oil and gas to flow more freely. Peer Carbo Ceramics (NYSE: CRR) also notched a 22% uptick in revenue for the quarter. Carbo is one of the leading manufacturers of ceramic proppants.

But if you're investing in China GengSheng because of rare-earth elements, get out now! It doesn't have any. More than half the CAPS All-Stars rating the proppant and abrasives maker think it's going to underperform the market indexes, probably because of its mistaken identity. Add the stock to the Fool's free portfolio tracker to find out if it's able to prop up its value based on its real business lines.

Don't sell yourself short
It pays to start your own research on these stocks on Motley Fool CAPS. Read a company's financial reports, scrutinize key data and charts, and examine the comments your fellow investors have made, all from a stock's CAPS page. Then share your views with the CAPS community: Squeeze 'em till it hurts, or short 'em till the sun don't shine? May the best argument prevail!