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 of stocks that lose money over the long haul. According to hedge fund institution Blackstar Funds, even with dividends included, between 1983 and 2006, 64% (nearly two-thirds) of stocks underperformed the Russell 3000, a broad-scope market index.
A large influx of short-sellers shouldn't be a damning factor to any company, but it could be a red flag from traders that something may not be as cut-and-dried as it appears. Let's take a look at three companies that have seen a rapid increase in the amount of shares currently sold short and see if traders are blowing smoke or if their worry could have some merit.
Short Percentage Increase, Sept. 15 to Sept. 30
Short Shares as a Percentage of Float
Apartment Investment & Management
United States Steel
iShares MSCI Emerging Markets
Source: The Wall Street Journal. NM = not meaningful; the iShares ETF has a regularly changing share count.
The housing market is a mess, which can only mean good news for one aspect of the housing sector: rentals. Based on data released last week that showed multi-family housing starts rose 51.3% in September, it's evident that builders are attempting to ramp up apartment production in response to a still high foreclosure rate and tight credit market.
With most economic data supporting the notion that rental demand will remain strong for the foreseeable future, bets against apartment REITs like Apartment Investment & Management and Equity Residential
The steel sector truly lives and dies by the sword that is China's economy. When U.S. steel demand dropped off significantly in 2008, steel companies found themselves surprisingly supported by strong Chinese demand for steel products. Now with tangible proof that China's economy is slowing down from years of torrid growth, the steel sector could be shaping up to get flattened.
Things do not look rosy for United States Steel, which is set to report earnings this week. For starters, U.S. Steel has missed analysts' estimates by a mile in each of the past five quarters. In fact, over the past three months, the company's projected quarterly profit has dropped by more than 50%. Even more troublesome, rival Nucor
The roof is on fire
It's not unusual for investors to overreact to bad news -- but when an entire country is on the brink of default, there is actual cause for concern. So as Greece tiptoes slower than molasses toward a sovereign debt default, short-sellers have been increasing their holdings in iShares MSCI Emerging Markets ETF -- and for good reason!
As fellow Fool Dan Caplinger pointed out just last week, even for someone like myself who wouldn't touch an emerging-market ETF with a 10-foot pole, you'd be doing yourself a disservice by buying the iShares Emerging Markets ETF, which charges a 0.69% fee, when the Vanguard MSCI Emerging Markets
This week, we ran with the basic macroeconomic principles of the past few years -- namely that betting against anything housing or emerging markets is probably going to work out well for short-sellers. Word to the wise: Never stand in the way of a macroeconomic trend!
What's your take -- do the shorts have these stocks pegged, or are they blowing smoke? Share your thoughts in the comments section below and consider adding Apartment Investing & Management, United States Steel, and iShares MSCI Emerging Markets to your free and personalized watchlist to keep up with the latest news on each stock.