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 American Stock Exchange with the largest short positions. We'll then consult the collective intelligence of Motley Fool CAPS to see which of these companies Fools believe have the power to make short work of short-sellers.


Shares Short, Dec. 31

Shares Short, Dec. 14

% Change

Total Shares Out

Dec. % Total Out

CAPS Rating (out of 5)

Ford (NYSE: F)







Countrywide Financial (NYSE: CFC)







Citigroup (NYSE: C)







Washington Mutual (NYSE: WM)







Qwest Communications (NYSE: Q)







Shares short data courtesy of CAPS rating courtesy of Motley Fool CAPS. Share counts in millions.

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 80,000-strong CAPS community just offers a good place to start.

A new lease on life
Perhaps it was the Christmas season. Maybe the short-sellers were feeling charitable. Whatever the reason, most of these frequently shorted stocks saw their number of shares short decline in the last two weeks of the month.

One number we're likely to see change further in the coming weeks is the number of short-sellers on Washington Mutual. While Countrywide Financial looks like it will be rescued by Bank of America (NYSE: BAC), ailing banker Washington Mutual may have a suitor of its own in the form of JPMorgan Chase (NYSE: JPM). Having announced it will cut its dividend, eliminate thousands of jobs, and try to find some $2.5 billion in new capital during a credit crunch, WaMu has recently been looking more like Shamu beaching itself.

The subprime mortgage fallout has hit mortgage companies and financial institutions hard; asset writedowns make their underpinnings suddenly look less stable, and their shares fall as a result. That's also made them look very cheap, and we may see a wave of consolidation sweeping through these industries. JPMorgan's possible courtship of WaMu sent its shares up as much as 8% on Friday. Such movements might result in short-sellers having to cover their positions.

More than 1,500 investors on CAPS have registered their opinions on Washington Mutual, and while the majority feel that it will outperform the market, All-Stars -- those who consistently outperform their peers over time -- think otherwise by about two to one. Yet even those bearish about the banking giant see an opportunity. CAPS All-Star mevanzzz, with a 98.41 player rating, sees Washington Mutual as a possible takeover candidate. In this pitch from last Friday, mevanzzz noted the risk to shorts inherent in that possibility:

WaMu shares are risky here, long or short. The shares are significantly down for the year, due to the sub-prime mortgage crisis. Shares were up nearly 15% on the announcement of BofA's pending acquisition of CFC. I expect that in the short-term the CFC buy-out premium will be eroded as recession risk is priced into the broader market.

The long side of this trade is a merger arbitrage play, and a position that I will likely take soon. WaMu is a strong national brand with an extremely loyal customer base. I expect one of the better capitalized national banks will aquire WaMu in 2008. I'd hate to get caught short when it happens.

That was also the view of CAPS player SteveL103, another investor who predicted that WaMu's days of going it alone are numbered:

WAMU is probably down for the count as a stand-alone company. Expect a vulture to get it on the cheap. Wont even be around in five years.

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!

Motley Fool Income Investor has all the bases covered: Washington Mutual, Bank of America, and JPMorgan Chase are all recommendations. A 30-day trial subscription can be your shortcut to handsome profits for your portfolio.

Fool contributor Rich Duprey owns shares of Ford, but does not have a financial position in any of the other stocks mentioned in this article. You can see his holdings here. There's no shortcut around the Motley Fool's disclosure policy.