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Are the Shorts Killing These Stocks?

Jeremy Bowman
September 18, 2012

A funny thing happened when SodaStream International (Nasdaq: SODA  ) reported earnings a month ago. Shares initially shot higher after the company again beat revenue and earnings estimates, posting $0.52 per share and beating by $0.06. But after initially moving higher by nearly 8%, by the end of the day, the stock was actually trading lower than the previous day's close, down 0.7%, and would continue to fall for the next five days, in total a 15% loss from that intra-day high on no other news.

What happened, here? After all, quarterly earnings tend to be the major factor influencing a company's stock price, and beating estimates generally sends shares higher, as we saw immediately after the earnings report. After an earnings beat, Wall Street analysts hustle to raise their future estimates, helping to lock in those gains and sometimes pumping the stock even higher.

That didn't happen though. Even more bizarre is that heavily shorted stocks like SodaStream usually soar after good news as the shorts rush to cover their positions, an effect known as a short squeeze.

This time around, it seems like the pressure from the shorts forced the stock back down, as it has many times before. Despite beating earnings estimates by an average of 22% in the last four quarters, shares have essentially been flat in the past year. I think these short-sellers can only keep the stock down for so long, however. Considering it now trades at a forward P/E of just 14, if the company can beat estimates for a couple more quarters and maintain its strong growth rate, it could be too cheap to ignore.

Let's take a look at a couple other stocks trying to break out from the shorts.

Herbalife (NYSE: HLF  ) had been one of the best performing stocks in the market since the recession, rising as much as 1,000% at one point since early 2009. But then something bizarre happened, as the chart below shows.

HLF Chart

HLF data by YCharts

What happened in April that caused this stock to tumble so sharply? After all, Herbalife actually beat earnings estimates by 9%. But on that call, David Einhorn, manager of the Greenlight Capital hedge fund and noted short-seller, showed up and asked a few questions about the company's business model. Herbalife is a multi-level marketing company, meaning it sells its products to individual distributors at a discount, who then sell to end users for the full price. As the distributors sell more, they can rise up in the ranks and get better discounts. Einhorn probed the veracity of Herbalife's financial reporting, asking pointed questions about the actual sales to end consumers and the percentage of distributors that get promoted to supervisors.

Einhorn seemed to be implying that Herbalife's sales were not being reported accurately, as he had done successfully with a presentation explaining why he was shorting Green Mountain Coffee Roasters (Nasdaq: GMCR  ) . He never even took out an actual short position on Herbalife, however, but shares still fell 30%. Einhorn made no such appearance on Herbalife's second-quarter conference call, and the company has adequately answered similar questions fro