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 profit.

This week, let's look at companies on the Nasdaq exchange with the largest decrease in the 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 continue to make short work of short-sellers.

Sources: wsj.com and CAPS. Share counts in millions.
*Shares outstanding, minus shares controlled by insiders, restricted stock, and shares held by 5% owners.

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 110,000-plus-strong CAPS community offers a good place to start.

A serial acquirer
Growth by acquisition is a difficult game to play. Motley Fool Hidden Gems recommendation Nuance Communications, which specializes in voice-recognition software, has been playing it aggressively lately. The company behind Microsoft's (NASDAQ:MSFT) Sync technology reported earnings in May that showed a wide disparity between GAAP and non-GAAP results, primarily because of so many one-time charges related to its buying spree. (Considering that the company has done this for the past six quarters, maybe such charges shouldn't be backed out as "one time.")

Even though Nuance's shares have steadily declined since then, short interest has also fallen. Perhaps short-sellers took a look at the non-GAAP numbers and realized the stock might be ready to rebound.

Investors like CAPS' smallcapbigyield find Nuance to be a fine addition to the portfolio of a long-term investor because they expect its technology to be everywhere:

A clear-cut industry leader in voice recognition software will one day be in almost every car, phone and home. We'll use the technology in places we haven't even dreamed of using it yet... If you're looking for a one-year investment, look elsewhere. If you're thinking long-term, Nuance is a good choice. With a market cap of 3.53B on negative income, they've got a big hill to climb ... but make sure to look at their total equity: currently 1.12B.

Women's intuition
Another company that's been making noise by making acquisitions is Hologic, which received some lumps for its buyout of Cytec but pushed ahead with a merger with Third Wave Technologies, a rival in the field of women's medicine. Third Wave's Invader technology should allow Hologic to develop additional molecular diagnostic tests and spur additional revenue growth,  which may have short-sellers thinking twice.

CAPS member ennuihead acknowledges the risk inherent in Hologic because of the debt it has taken on to make the acquisitions, but finds the complementary businesses to outweigh those risks at this juncture. Here's an excerpt from the month-old pitch:

This stock has had the stuffing beat out of it since the Cytec merger... Hologic still dominates the digital mammography market. I used to work for Siemens and know -- Siemens licenses [Hologic]'s detector technology... Also, they are smart to beef up the [diagnostics] side of women's health [with] Third Wave... Still, there is risk. They have incurred a lot of debt and have issued convertible notes to offset some of it. I'd like to see them concentrate on strengthening the balance sheet, but strategically their moves make sense.

Speak up
You've heard from the CAPS community -- now it's time to have your say. Share your views with the CAPS community: Squeeze 'em til it hurts, or short 'em til the sun don't shine? May the best argument prevail!