Beating Back the Short 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.

This week let's look at companies on AMEX with the largest number of shares short. Combining that with the collective intelligence of Motley Fool CAPS, we'll 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, or it might be that their troubles are short-term. Only Foolish due diligence will tell you for certain; our 96,000-strong CAPS community offers a good place to start. Yet investors seem divided in their opinion of these companies, as only three have garnered CAPS ratings of three stars or better.

Coal miner's daughter
While solar energy and ethanol have been soaking up the warmth of investor interest over the last year, a plentiful resource that often gets overlooked because of a belief that it's dirty is this country's coal reserves. According to the latest statistics from the Energy Information Administration, coal production in 2006 was at record levels even though consumption declined because of warmer weather and lower natural gas prices. The newest statistics are due out this month.

Yet a number of companies are seeking to help the U.S. break its dependence on foreign oil by converting coal into fuel. South African all-star coal-to-fuel manufacturer Sasol has been in the business for 50 years, while a number of homegrown companies like Rentech believe they have perfected the well-established Fischer-Tropsch method into a proprietary system of their own.

Rentech hopes a commercial facility it will build in Natchez, Miss., will prove the viability of its processes, which use coal or petroleum coke mixed with biomass to reduce the greenhouse gases they produce. It further plans to capture the carbon dioxide emitted and sell it to Denbury Resources (NYSE: DNR), with which it has a long-standing contract.

As exciting as that is for the future of Rentech, the root of its revenue generation has been its ammonia and nitrogen fertilizer production, which accounts for 80% of revenue. Making fertilizer for the booming agricultural markets is a potential bonanza.

CAPS player jeffin seems to recognize that its current operations are valuable for generating cash, while the coal-to-liquid technology may be its future. Here's an excerpt from the early December pitch:

Strong business model, proprietary technology recognized by state & federal governments as worthy of support, no debt, good cash, waiting customers on a large scale. Lead time for profit will be a while until first commercial plant is scaled up ... approx. 2 years. Good [present] cash flow from other operations.

In December, Rentech received a genuine buyout offer from Sherwood Investments for $2.28 a share, significantly below the $2.70 it had sent as an "offer to make an offer" the prior month. The lowered price reflects write-offs subsequently made by Rentech, according to Sherwood. Since this real offer was made, the market has been keeping the share price well below even that discounted price, perhaps in belief that the buyer won't get the deal done.

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!