5 Stocks Under Attack

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 potential profits.

Let's examine this month's list of companies on the New York Stock Exchange with the largest share count increase in short positions. We'll consult the collective intelligence of Motley Fool CAPS to see which of these firms Fools believe have the power to make short work of short sellers.

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 79,000-strong CAPS community just offers a good place to start.

For example, MBIA's appearance on the list probably isn't a surprise, considering that a few of the players in the field are facing a downgrade on their credit ratings, even as they contend with Berkshire Hathaway's (NYSE:BRK-A) (NYSE:BRK-B) entrance to the industry. Using its own sterling credit rating as a lure, Warren Buffett may just be able to wrest enough business away from the industry stalwarts at a time when they can least afford to lose.

Storing up profits
Data storage specialist EMC has been a top-rated enterprise software firm on CAPS for a while, as the need for its services continues to grow. Its core business, data storage, has recently been overshadowed by the prospects for virtualization to become a huge driver of future growth. Yet with 80% of its revenue still derived from storage, the market seems to have been discounting most of its value.

Last summer's spinoff of VMWare (NYSE:VMW) has contributed to much of EMC's recent excitement, considering that EMC owns 86% of the firm. That probably has helped in part to bid up VMWare's stock price from its IPO, and it may also explain the increase in EMC's own shorted shares. VMWare's stock has fallen back by one-third since it peaked at $125 at the end of October. Undoubtedly, traders believe that a further decline in VMWare's shares will hurt EMC's own valuation.

Virtualization will remain an important driver for EMC, but with the continued push for increased digital data, EMC's data storage systems will also be a profit center now and in the future.

The market's failure to properly value the rest of EMC's business without VMWare bewilders CAPS All-Stars like InvestorDeb, who recently felt that EMC's data storage business was being considered virtually worthless:

I am baffled that EMC is being sold off today. This stock ticked below $18/share today, which is woefully undervalued. The stock's ownership stake in VMW alone is worth as much as $17/share... perhaps more... The company is on track to post a great quarter, yet continues to trade at a discount to other companies in the security and store area. I bought 1/2 of a full position today, and may regret not going all in at this level...

Others, like JjcampNR, acknowledge VMWare's contribution, but think the potential for growth in data storage is where it's at for EMC right now:

Storage needs are growing exponentially both in the US and in countries building new infrastructure to support their emerging economies. While a slowing economy may slow some technology spending, if you've outgrown your current storage solution your company simply cannot continue functioning unless you have somewhere to save your data.

Speak up
You've heard from CAPS investors -- now it's your turn to have your say. 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!