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.

Below, I've listed a few of the top companies on the Nasdaq stock exchange with the largest percentage increases in shares short. Combining that data 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.

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
According to Forrester Research, the e-book market is thriving. Readers have purchased more than $1 billion in e-books thus far, and Forrester expects that number to triple by 2015. Amazon.com, despite not revealing the number of Kindle e-book readers it's sold, is the acknowledged leader, though Barnes & Noble (NYSE: BKS) managed -- up till this latest quarter, anyway -- to reenergize itself, partially through its Nook reader. The potential for the segment was potent enough that it went so far as to lose $145 million over the past nine months to invest more in the technology.

Yet CNN recently offered up an intriguing suggestion to further tighten Amazon's grip on the niche: CEO Jeff Bezos should give away the Kindle for free. With almost half the market to itself (Apple's iPad reportedly owns another third) a free Kindle might help Amazon grow the number of e-book readers from its current 7% level. According to Forrester, of those book readers who already have a Kindle, Nook, or Sony Reader, two-thirds do their reading digitally.

CAPS member Ron0987 says that Amazon remains the dominant force in the industry, and its multiple revenue streams, including the Kindle, make its recent stock price weakness a smart opportunity to invest:

The general public does not understand that Amazon does not care about ratings or Wall Street; Amazon cares about improving and growing its business,which is what it did when it spent some of its cash on new infrastructure. This type of spending is good because it ensures a more stable and stronger future.

Would free Kindles be a winning strategy for Amazon? Let us know in the comments section below or on the Amazon.com CAPS page.

No small thing
The optical networking sector is hot, with JDS Uniphase, Oclaro (Nasdaq: OCLR), and Finisar all reporting strong results. The shorts may be leery of JDS's focus on optical networking, a historically volatile segment -- but they're also ignoring the test and measurement business, which actually accounts for nearly half of Uniphase's revenue. After rival Agilent issued a bullish outlook for testing and measurement in its own recent quarterly earnings, optimistic investors lifted JDS's shares.

While CAPS member DrDick1954 expects the optical networking segment to hold its own for Uniphase, fellow CAPS member daddycswhite thinks the company's merely enjoying a halo effect from the rest of the industry, and believes it will return to form soon enough:

They've been BARELY cashflow positive for a short time, so again, why does anyone expect anything but the same. There's been no change in their products, no acquisitions, no divestitures of nonprofiable channels, so the idea of JDSU returning to earth is just a matter of when the lustre rubs off this industry

 Add the stock to your watchlist to see whether JDS Uniphase can test new highs again.

Squeezed to death
Betting against Orexigen Therapeutics at this point is like kicking a man when he's already down. After the FDA eviscerated the diet pill maker and its brethren VIVUS (Nasdaq: VVUS) and Arena Pharmaceuticals (Nasdaq: ARNA) for safety concerns for their respective drugs, Orexigen announced that it would slash its workforce 40%. Worse yet, its CFO decided to throw in the towel "for personal reasons."

Maybe the shorts feel that Orexigen doesn't even merit the meager 10% bounce it got over the past month, following its 73% freefall. The company's investors seem to have little hope left, and CAPS member investorpatent says that even the company's tiny upward move merely owed to shorts covering their positions. Now, this CAPS member thinks, Orexigen's ready to resume its descent:

Destined to fail, pop was caused by short covering, now reality kicking in. Worth probably $1 but surely not over $3. Coming back to earth soon. No sensible investor will wait 4-5 years and heavy dillution for a dubious outcome. Only positive is honest management.

Add Orexigen to the Fool's free portfolio tracker to stay on top of its recovery -- if it ever arrives.

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!