Please ensure Javascript is enabled for purposes of website accessibility

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

By Sean Williams - Apr 15, 2013 at 8:50PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Do short-sellers have these stocks pegged? You be the judge!

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 that lose money over the long haul. According to hedge fund institution Blackstar Funds, even with dividends included, between 1983 and 2006, 64% of stocks underperformed the Russell 3000, a broad-scope market index.

A large influx of short-sellers shouldn't be a condemning 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 look at three companies that have seen a rapid increase in the number of shares sold short and see whether traders are blowing smoke or if their worry has some merit.


Short Increase March 15 to March 29

Short Shares as a % of Float

iShares Gold Trust(IAU -0.06%)



Hawaiian Electric Industries(HE 3.95%)



HudBay Minerals(HBM 5.96%)



Source: The Wall Street Journal.
*ETFs don't have a fixed share count.

Plenty of luster left in this ETF
The shiny yellow metal may be in the midst of an amazing 11-year ascent, but the past few months have been nothing short of ugly for physical gold, as the broad-based S&P 500 has reached new all-time highs and most investor fear has been placed on the back burner. Often viewed as an inflation and fear hedge, spot gold prices and miners have taken a dive. To add the icing on the cake, Cyprus, which is in the midst of receiving a sizable bailout from the EU, needed to liquidate some of its gold bullion position, which has pressured gold markets.

Despite the bearishness, I think now could be the time to start thinking about buying this iShares Gold Trust ETF. For one, I can hardly find anyone that's optimistic about the spot gold prices moving forward. As a Warren Buffett famous adage goes, this could be the perfect time to "be greedy when others are fearful."

Secondly, I can't help pointing out that economic data thus far has been good, but nowhere near great. Fourth-quarter U.S. GDP growth was just 0.4% and unemployment rates remain historically high, which bodes well that an eventual correction (and a heightened level of investor fear) could be around the corner.

Finally, it's a simple matter of scarcity and demand. Silver may have more practical uses than gold, but demand from rapidly growing China for gold use in electronics, as well as governments around the globe buying gold as a currency hedge (think Russia, China, and Switzerland) should continue to prop up its price. I'd suggest using Cyprus' bullion sale as a possible point of entry into this bullion-owning ETF.

An alternate in the energy sector
Want an easy way to tick off shareholders in the slow-but-steady-growth electric utility sector? Try pricing 7 million new shares on the market and netting $180 million. Although the dilution effect isn't immediate, shareholders in Hawaii Electric Industries, also known as HEI, still weren't pleased that the effective share count would eventually rise and possibly make their shares worth less.

However, it's also worth noting that HEI is a pioneer in alternative-energy innovation, right alongside NextEra Energy (NEE 1.06%), and a share offering is probably not enough to derail the long-term opportunity here.

NextEra and HEI are in perfect position to benefit from policies being put in place by the Obama administration over the next decade and beyond, which are focused on promoting natural gas, solar, wind, and other alternative-energy sources as a way to remove America's dependence on foreign oil. NextEra is the largest alternative-energy provider in the U.S., boasting the nation's largest wind-generating capacity and a sizable solar farm. Where HEI differentiates itself, but also places itself among the elite in alternative-energy like NextEra, happens to be in its use of biofuels to run its Campbell Industrial Park generating station. Few utilities have been able to run a facility solely on biofuels, so this is a big (and cost-saving) step.

Let's also not forget that HEI has a veritable monopoly in Hawaii, which creates a near-impossible barrier-to-entry in the costly electric utility sector.

Shareholders may be disgruntled in the near term with the share offering, but this, too, shall pass.

If you build it, they will mine
As we've established, not many investors are happy with mining stocks at the moment -- and that goes double for any companies with big capital expenditure budgets related to mine buildout costs. HudBay Minerals is one such company working on a big expansion, but thankfully it has a silver heavyweight in its corner, providing some much appreciated financial backing.

In August, silver royalty interests company Silver Wheaton (WPM 2.77%) and HudBay agreed on a long-term contract that will supply Silver Wheaton 100% of HudBay's Constancia and 777 mine silver at a discounted price of $5.90 an ounce, as well as 100% of the gold production at its 777 mine at a discounted price of $400 an ounce until at least 2016. In return, Silver Wheaton injected HudBay with $500 million immediately to complete its Constancia buildout, with two additional $125 million payments to follow if certain measures are met by HudBay. The end result should be a win-win for both companies, with Silver Wheaton securing another long-term royalty stream and HudBay remaining healthfully net cash positive and profitable.

I can somewhat understand investors' apathy surrounding the deal, since Constancia isn't ready to be commissioned until the first quarter of 2015 at the earliest, but the company's updated precious-metal reserves, released three weeks ago, showed that Constancia's measured, indicated, and inferred mineral reserves rose dramatically in 2012. I believe short-sellers are digging in the wrong area looking for treasure by betting against HudBay Minerals.

Foolish roundup
This week's theme is all about alternative thinking. No one likes physical gold or its miners at the moment, which could make for a perfect entry into the iShares Gold Trust or even the well-financed HudBay Minerals. As for HEI, it's a simple case of its alternative-energy program leading long-term costs lower and it maintaining a monopoly in Hawaii's electric-generating business.

What's your take on these three stocks? Do short-sellers have these stocks pegged, or are they blowing smoke? Share your thoughts in the comments section below.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Hawaiian Electric Industries, Inc. Stock Quote
Hawaiian Electric Industries, Inc.
$40.54 (3.95%) $1.54
iShares Gold Trust Stock Quote
iShares Gold Trust
$34.66 (-0.06%) $0.02
Hudbay Minerals Inc. Stock Quote
Hudbay Minerals Inc.
$4.27 (5.96%) $0.24
Wheaton Precious Metals Corp. Stock Quote
Wheaton Precious Metals Corp.
$38.20 (2.77%) $1.03
NextEra Energy, Inc. Stock Quote
NextEra Energy, Inc.
$78.02 (1.06%) $0.82

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 06/25/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.