Is Now the Time to Short Stocks?

Last month, we introduced you to two of our most popular indexes in the stock-picking realm of Motley Fool CAPS: a portfolio of five-star stocks, and a corresponding portfolio of one-star stocks.

That's the long and the short of it
With each, we Fools are seeking to learn what stocks are worth betting on, and which are worth betting against. But we also want to know which strategy pays more. Is it better to bet long? Or is it better to be short?

So far, it's the latter. Here's the breakdown:

What stands out for me here is that, when it comes to shorting in CAPS, it's easier to pick a market-beater. Perhaps that's because of the crazy gyrations the market has been experiencing recently?

Perhaps. But I also find it interesting that the biggest winner for the five-star index, Aluminum Corp. of China, has returned almost triple the gains of American Home Mortgage, which is the top short for the one-star index.

Meanwhile, the biggest loser among the five-star stocks dropped roughly 46% versus the S&P 500. That compares well to the breathtaking 522-point drubbing the one-star index has taken on DryShips. (It's hardly alone.)

What they're buying and selling
Here are three top performers recently added to the one-star index:

And here are three top performers added to the five-star index:

Of these choices, I'm particularly fond of Applix, which is a Rule Breakers pick. Trouble is, Cognos (NASDAQ:COGN) recently acquired Applix for $17.87 a share -- a steep discount to the $28 or so a share that the company is actually worth. What a shame.

And yet we move on. If I have to choose a second option, I choose to short penny stock AtheroGenics, whose signature drug, AGI-1067, suffered a heart attack when AstraZeneca announced that it was ineffective in a large-scale trial.

Why short a stock already down more than 40%? Well, I'm not much of a biotech investor, but I pay attention when smart biotech followers like Foolish colleague Brian Lawler speak out. Quoting from his most recent take:

AtheroGenics' decision to immediately rush into a large and more expensive clinical trial without even an interim study in between is curious. The drugmaker is trading at a low $70 million valuation, but investors who buy into shares today shouldn't get their hopes up for the outcome of the diabetes study until AtheroGenics publishes more evidence corroborating AGI-1067's efficacy and safety ...

Intrigued? Do your own due diligence and then check in with thousands of other investors at CAPS. And, if you'd like, add your own commentary. You'll be helping your fellow Fools and testing your ideas at the same time. Click here to get started now; the service is 100% free.

See you back here next month for more picks from our CAPS contingent.