Do the Shorts Know Something You Don't?

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.

These top companies on the American Stock Exchange had some of the largest percentage increase in shares sold 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.

Sources: wsj.com. Share counts in millions. NM = not meaningful

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 170,000-strong CAPS community offers just such a good place to start.

The short list
CEL-SCI has been trying to get into phase 3 trials with its Multikine head and neck cancer treatment. One analyst says claims about the drug's efficacy might be overstated, but CEL-SCI has nonetheless recently received approval from Russia, Hungary, and Taiwan to begin phase 3 trials. Similar trials are under way in Israel, in cooperation with Teva Pharmaceuticals (Nasdaq: TEVA). Buyout rumors have given CEL-SCI's shares a further boost as well.

Are the shorts expecting CEL-SCI trials to ultimately fail? Biotech investors are all too familiar with promising early clinical trials that fizzle out in failed late-stage tests. And CEL-SCI's series of PR announcements trumpeting every country in which it's starting trials is a bit over-the-top. With the stock up more than 30% over the past month on no real news to speak of, shorts may now expect CEL-SCI shares to fall back to a more reasonable level.

CAPS member mrnash33 doesn't believe that the shorts are betting heavily against CEL-SCI because of its business model or prospects:

While a few of these bloggers out there have shorted the stock and talked it down, the fact is the company does have a product. It has taken them time to get to market because they do not have the budgets that the big Pharma companies have, but they do have a proven product. Most of the nay-sayers have shorted the stock, not because it is bad, but because it is so cheap and easy to manipulate-don't fall for that-look at the facts. Buy while it is cheap-what can it hurt and it very well might make you some big money.

Drilling deep for dollars
With oil prices topping $80 a barrel, it's not surprising to see a number of energy stocks posting enormous gains. Kodiak Oil & Gas, up 82% year to date, has a number of wells awaiting completion in the important Williston Basin. Natural-resource exploration company U.S. Energy, along with its partner Brigham Exploration (Nasdaq: BEXP), is also warming up to the region.

Having established a wide berth in the Bakken, and controlling approximately 104,000 gross acres in the Basin, Kodiak could end up with more sales from just two wells than it had all of last year, according to CAPS member kingleader. When you add in all the wells that should be completed this year, kingleader thinks Kodiak is poised to run:

The 2 wells it just completed in the bakken should provide it more sales than it had all last year. Six more wells are scheduled for completion in the area for q4, 2010. Has thousands of acres in the area. Co. guidance says they themselves expect boosted revenue growth for the remainder of the year and next year due to their successes.

Yet in a comment to kingleader's pitch, tommy2shot argued that the costs of extracting oil in the Bakken are growing, hurting profits. The shorts might be expecting disappointment when Kodiak reports earnings next month.

Squeezed to death
Perhaps the shorts think that the market has overvalued the patents that VirnetX holds, which helped the company squeeze a nine-figure settlement out of Microsoft (Nasdaq: MSFT). In this case, the shorts might be wrong. VirnetX is using the momentum from the Microsoft case to go after Cisco (Nasdaq: CSCO) and three other tech companies. The company will also approach wireless carriers rolling out their 4G networks, since every connected device on the network will be required to have a secure domain name. CAPS member Jonock says that's VirnetX's bread and butter.

To determine whether VirtnetX belongs in your portfolio, and to know how many similar businesses already occupy your stable of investments, be sure to add it into the Fool's free portfolio tracker, My Watchlist.

Don't sell yourself short
It pays to start your own research on these stocks on Motley Fool CAPS. Read a company's financial reports, scrutinize key data and charts, and examine the comments your fellow investors have made all from a stock's CAPS page. Then 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!