Shorts Are Piling Into These Stocks. Should You Be Worried?

The best thing about the stock market is that you can make money in either direction. Historically, stock indexes have tended to trend up over the long term. But when you look at individual stocks, you'll find plenty of stocks that lose money over the long haul. According to hedge fund institution Blackstar Funds, even with dividends included, between 1983 and 2006, 64% (nearly two-thirds) of stocks underperformed the Russell 3000, a broad-scope market index.

A large influx of short-sellers shouldn't be a damning factor to any company, but it could be a red flag from traders that something may not be as cut-and-dried as it appears. Let's take a look at three companies that have seen a rapid increase in the amount of shares currently sold short and see if traders are blowing smoke or if their worry could have some merit.

Source: The Wall Street Journal.

A foolish bet
Some would say my love affair with small-cap companies is a fool's bet (with a small "f") due to their lack of visibility and high volatility. All I can say is if that's the case, then those same naysayers have to be nuts to bet against Berkshire Hathaway (NYSE: BRK-A).

Warren Buffett's conglomerate has its fingers in veritably every sector of the market, which provides a low-risk opportunity to invest. Buffett is so confident in the U.S. economy and the ability of his company to outperform that Berkshire recently authorized a share buyback. The buyback allows Berkshire to repurchase shares on the open market at up to a 10% premium to book value, but only as long as it maintains a cash position of $20 billion in order to maintain adequate financial liquidity. In short, Berkshire continues to be well-diversified and is finding new ways to buoy shareholder value. Good luck betting against that, short-sellers.

Tag it and bag it
Clip this eagle's wings, I think not! Shares of American Eagle Outfitters have been beaten, battered, and bruised over the past year, but I think it's a bit too early to pile on the short bandwagon, especially considering how well its peers are performing.

Although American Eagle no longer reports monthly same-store sales figures, that didn't stop Zumiez (Nasdaq: ZUMZ) and Buckle (NYSE: BKE) from reporting September same-store sales that rose by 10.1% and 10.3%, respectively. According to Bloomberg, retail sales in September look to have risen by their highest levels in six months -- a bullish sign heading into the lucrative holiday season. What I do know is American Eagle's 3.6% dividend yield ranks near the top of the sector, and insiders are buying shares despite rising short interest. I agree with insiders, and think the stock may be too cheap to pass up here.

DV-Arrrrggghhh!
Shareholders of hhgregg have been privy to their own version of 3-D: despair, desperation, and downgrades.

As one of the few remaining brick-and-mortar electronics retailers, hhgregg has suffered as it attempts to cope with the negative impact online retail has had on its business in terms of killing its pricing power. While I much prefer its larger competitor Best Buy (NYSE: BBY), investors should take Best Buy's results as a cue that television pricing isn't going to improve anytime soon for hhgregg. Currently the NYSE's most heavily shorted company at 52.8% of its float, hhgregg has been smothered in pessimism from the ground up, and I would just as soon let the shorts feast on this one for the time being.

Foolish roundup
If you bet against well-diversified businesses with mountains of cash, I'd be willing to go on record as saying you'll be wrong more often than right. If you want to bet against a stock, seek out not only weak sectors, but the weakest companies within those sectors.

What's your take on these three companies? Are you a buyer or a seller at these levels? Share your thoughts in the comments section below and consider adding Berkshire Hathaway, American Eagle Outfitters, and hhgregg to your free and personalized watchlist to keep up on the latest news for each company.