5 Stocks Under Attack

Everyone loves a winner, so it's reasonable to assume 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 biggest short interest ratios. The ratio, also called "days to cover," essentially divides a stock's number of shares sold short by the average daily trading volume. The end result is the theoretical number of days it would take for the shorts to cover their positions. While a high short interest ratio can signal a stock primed for a short squeeze, it also indicates a company disliked by a lot of investors. So we'll also 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.

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 82,000-strong CAPS community just offers a good place to start.

These are not particularly well-liked stocks -- as their CAPS ratings show -- and each seems to be appropriately distressed to warrant such rankings. For instance, Sulphco may or may not have a viable technology to strip sulfur and nitrogen from oil, and Ladenburg Thalmann might be on its deathbed, despite showing positive returns over the past year.

Easing the pain
Minrad International is involved primarily in pain management, but its shareholders have been suffering. Decreases in production have resulted from a plant expansion for its inhaled anesthetic, sevoflurane, which IMS believes represents a $400 million market opportunity in the U.S. alone.

According to market researchers at IMS, sevoflurane sales have grown at an 11% pace annually over the past few years. Yet this isn't the first time Minrad has had production problems with the drug, and it's up against stiff competition from market leaders Abbott Labs (NYSE: ABT) and Baxter (NYSE: BAX).

Still, despite its weak rating, more than 94% of CAPS investors think it will outperform the market. Top-rated All-Star pennysplants has twice weighed in on Minrad as a potential winning investment. When he first opined on the company last year, he recognized that the stock could be volatile -- which it subsequently proved to be -- but that there was still a lot going for it:

Minrad actually has products, customers, and markets. It also licenses (or acquires) products/technologies/processes from other companies to augment their own IP and development efforts. ... It is increasing R&D investment. ... Has partner agreements with some pretty heavy hitters around the world. ... If equipment sales take off (see below), there will be significant "disposable" revenues for years to come. But that won't really take off for a while. It's the manufacturing and sale of generic inhalation anesthetics near term.

With FDA approval of its anesthetic won, a new production facility giving it expanded capacity, and a targeted market for growth, Minrad may have the chance to put the short sellers on the run.

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!