In Stock World, selling a stock "short" means borrowing shares from a broker and immediately selling (no waiting around, sorry), promising to buy the shares back and return them later. The hope is that the stock declines and can be bought back for less, and the short seller can pocket the difference. If the stock rises, of course, it'll cost more to buy back, resulting in a loss.

So what are the most-shorted stocks? Last week, we goggled at the 10 most shorted on the Nasdaq and AMEX, based on volume as of July. Today, we consider the second 10 most widely shorted stocks.

Off to a bad start
You might recall from last week that I was not wowed by America's choice of companies to short. These include Microsoft (NASDAQ:MSFT) at only 15 times free cash flow, Intel (NASDAQ:INTC), Cisco Systems (NASDAQ:CSCO), and the S&P 500 and Nasdaq 100 indexes. Not only have these been the most popular shorts since July, but since January. Talk about misery.

What's worse is that many recent short sellers may have been smeared by the market on the way down, had a change of heart at the worst time (too often that's human nature) and gone short, only to get clobbered again as the indexes chug higher. The market really can be the most depressing thing since coffee crystals if you're trying to time it (bad idea) and timing it wrong (typical).

At any rate, short selling is risky business, especially given the long-term trend of equities (have you noticed, since about 1800, that trend is up?). Investors who are short last week's top 10 list are riding some raging bulls, and those shorting the next 10 on the list have had a rough ride, too. Look how they've been bucked higher:

      Second 10 Highest Volume of Shares Short
    Company                         YTD Stock Return  (NASDAQ:AMZN)             +138%Oracle  (NASDAQ:ORCL)                  +12%Applied Materials  (NASDAQ:AMAT)       +54%Dell Computer  (NASDAQ:DELL)           +23%XM Satellite Radio  (NASDAQ:XMSR)     +366%  ADC Telecom.  (NASDAQ:ADCT)            +11%Comcast  (NASDAQ:CMCSA)                +23%Charter Commun.  (NASDAQ:CHTR)        +251%Amgen  (NASDAQ:AMGN)                   +41%Yahoo!  (NASDAQ:YHOO)                 +100%-From higher volume of shorts to less volume.
-Year-to-date returns do not include dividends.

A perfect showing from all 10 -- they're allup this year. Even worse (for the shorts), all but two are handily smashing the S&P 500 since January. Big ouch. This is July's list of most heavily shorted stocks, but all buttwo have been on this very list since January.

Only Amgen and ADC Telecommunications are more recent to the list, with Amgen appearing in March (and sitting on the list each month since), and ADC appearing in June. (Ironically, ADC is one of only two on the list not beating the S&P since January.) Meanwhile, who's shorting Applied Materials near a likely bottom of the wildly cyclical semiconductor market?

Short sellers, you're getting clobbered out there. Do you need some iodine?

But wait. It gets worse. When you look at the returns of the 20 most widely held stocks, vs. the 20 most shorted, you'll see that investors would have been better off doing the reverse: Owning the shorted stocks and (if shorting anything) shorting the widely held. Take a look at this:

      Avg. Gain Since Jan. '03
    20 Most Widely Shorted Stocks    +78%20 Most Widely Held Stocks       +31%Nasdaq Composite                 +33%S&P 500                          +14%

This shouts out the "Wisdom" of the stock market. Most big money managers are market losers -- as already evidenced by the fact that 80% of mutual funds lose to the indexes each year (that's why we recommend index funds).

Aside from all those money managers who are hedging their long positions (the market equivalent of being a wallflower at a dance -- taking few chances, seeing few rewards), why are investors so adamantly shorting this group of strong performers? I dunno. Do you? Let's look at some numbers.

    Company           P/FCF       Cash         LT        N/A        $988M         $2.0BOracle             21         6.5B          175MApplied Materials  96         5.2B          557MDell Computer      22         4.8B          506MXM Satellite      N/A         193M          568MADC Telecom.      N/A         377M          0.0Comcast           133         3.4B         29.9BCharter Comm.     N/A         212M         18.8BAmgen              48         4.9B          3.0BYahoo!             70         1.5B          750M-Free Cash Flow is estimated on trailing 12 months, most to 3/30 or 6/30.
-Tax benefit from stock options is not excluded from free cash flow.
-P/FCF is based on enterprise value (market cap - cash + l.t. debt).
-Cash & Equiv. and long-term debt is most recent, most to 6/30.

Again, it's somewhat baffling. As with last week's top 10 shorts, most balance sheets on today's list outshine those at the companies America widely owns. Here, only Charter and Comcast have dismal balance sheets. Charter looks especially precarious, piled with debt, while burning through remaining cash. But Comcast, which has the most debt on the list and one of the highest valuations, is also one of the country's most widely held stocks.

Meanwhile, most of these popular shorts -- Dell, Oracle, Applied Materials, Yahoo!, Amgen -- are strong, expanding businesses throwing off free cash flow. Yeah, I know. Our country is nuts. Or the market is, anyway. Maybe we all know that by now. If we don't, maybe we should.

I think that's our conclusion. (Tongue only partly in cheek.)

A short resource
Data for my last two columns were derived from, a great site for tracking short volume. Of all the lists provided, an exceptionally useful one is called "ratio of short positions to average daily volume," which shows stocks with the largest fraction of their available shares sold short. Also, you can see elsewhere which stocks are climbing the short lists. The information on smaller companies is useful and can be prescient of a coming problem, or a gain in price as shorts get squeezed.

Of companies mentioned, "Mojito" Jeff has a stake in Intel. All month we've run top 10 lists in celebration of the Fool's 10th anniversary. Celebrate yourself by visiting our 10 Ways to Make More Money Now.