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 profits.

Let's examine this month's list of companies on the Nasdaq stock exchange with the largest short positions. We'll then consult the collective intelligence of Motley Fool CAPS to see which of these companies Fools believe have the power to make short work of short-sellers.


Shares Short-Dec 31

Shares Short-Dec 14

% Change

Total Shares Out

Dec % Total Out

CAPS Rating (out of 5)

Level 3 Communications (Nasdaq: LVLT)







Microsoft (Nasdaq: MSFT)







Sirius Satellite Radio (Nasdaq: SIRI)







Charter Communications (Nasdaq: CHTR)







E*Trade Financial (Nasdaq: ETFC)







Shares-short data courtesy of CAPS rating courtesy of Motley Fool CAPS. 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 81,000-person-strong CAPS community just offers a good place to start.

Extending credit
Where most of the stocks here reported declines in their short positions -- perhaps reflecting the position that the companies have been ravaged sufficiently in this rough market, as well as gains by technology stocks toward the end of the year -- E*Trade Financial saw its short positions soar by more than 50%. (The Nasdaq exchange reported that short interest overall fell by 2%.)

Of course, while the discount brokerage house is pretty much over fears of bankruptcy, thanks to its $2.5 billion cash infusion in late November, investors are still concerned about how well it came through, and what will happen in the future. Perhaps that's because E*Trade has continued to sell off its portfolio of asset-backed securities, and because it's backing out of the institutional side of its investment game. It will focus instead on its retail customers. TD AMERITRADE (Nasdaq: AMTD) has benefitted E*Trade's woes, at least to some extent, by picking up some of the investors looking for other online brokers.

Despite the gloom surrounding E*Trade, the discount broker recently reported that it opened 87,000 new accounts last month. Though it didn't say how many it had lost in that time, E*Trade seems to have prevented too large a tide of customer withdrawals. Total client assets fell to $190 billion at the end of the year, from $192 billion at the end of November. The company was also able to maintain its $33 billion cash balance. The press release with those details seems to have at least stemmed the decline of its share price, which had fallen as low as $2.08; shares now trade at just less than $3 a stub.

Almost 1,500 CAPS players have given their opinion of E*Trade, and 90% remain convinced it will outperform the market. All-Stars -- those who consistently outperform their peers over time -- are a bit less convinced, with 84% giving the company a thumbs-up. For example, top-rated CAPS investor jwfoster, with a 99.97 player rating, thinks that its current price bakes in the possibility of bankruptcy, even though E*Trade's potential for survival remains great. Here's the pitch from last week:

The brokerage business here is probably worth $10 plus per share based on what they did before the banking and revenue per account numbers. With a healthy brokerage I would imagine they'll be able to save the business. With the stock at $2 it's priced for bankruptcy. I'll roll the dice that they survive and over the next three years you can get a 5 bagger.

CAPS player iaburky02 sees it as a win-win situation. Either E*Trade recovers and the price rises, or it gets bought out ... and the price rises:

Good company that got caught with [its] hand in the cookie jar. Too strong of a name and foundation to go belly up. It will recover or be snatched up. Either way [it's] a win.

Speak up
You've heard from CAPS investors -- now it's your turn. 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!

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Fool contributor Rich Duprey does not have a financial position in any of the stocks mentioned in this article. You can see his holdings here. There's no shortcut around the Motley Fool's disclosure policy.