Long-haul network operator Level 3 Communications (Nasdaq: LVLT) is under fire today. The stock dropped as much as 10% in early trading as investors digested another quarter of negative earnings and shrinking sales.

Some of the damage was ameliorated later in the day by some sunny comments in the earnings call. COO Jeff Storey reminded analysts that transatlantic traffic demands are rising and the content delivery operation -- in the vein of Limelight Networks (Nasdaq: LLNW) and Akamai Technologies (Nasdaq: AKAM) -- is doing well. But most of all, Level 3 is exploring new markets across Europe and expects to take market share from incumbent network operators over the long haul.

And therein lies the rub. Level 3 investors love the bushels of dark fiber the company has at its disposal, and the general theory is that sales, profits, and the share price will make a synchronized jump when network demand finally catches up to the current oversupply situation.

But Level 3 is working off an overleveraged balance sheet and tends to burn cash year in and year out -- though this quarter was a seasonal exception to that rule. The company can't afford to wait for that magic moment forever, and the bears smell blood in the water. 10% of the stock was sold short last February, but that tally has risen to over 16% as of the last short-sales disclosure. And the short-sellers have been making money along the way.

Will Level 3 make it to that turnaround, or is it just a mirage? Add the stock to your watchlist and you'll know, one way or the other.

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