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% of stocks -- nearly two-thirds -- 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 look at three companies that have seen a rapid increase in the amount of shares currently sold short and see whether traders are blowing smoke, or whether their worry has some merit.

Company

Short Percentage Increase Feb. 15 to Feb. 29

Short Shares as a Percentage of Float

Verizon (NYS: VZ) 15.1% 1.6%
Novartis (NYS: NVS) 160.2% 0.4%
Barrick Gold (NYS: ABX) 87.8% 1%

Source: The Wall Street Journal.

Can you hear me now?
I don't know whether or not short-sellers can hear me now, but reality is calling and things are looking up for one of the U.S.'s largest landline and mobile phone operators.

Verizon, much like peer AT&T, has made it clear that it sees much more robust capital expenditures on infrastructure during 2012 as compared to the weak results the majority of infrastructure providers reported in the fourth quarter. Verizon is about as steady as a dividend-paying company will be, with predictable cash flow and an extremely healthy 5.1% yield.

It doesn't even make sense to me to bet against Verizon from a valuation perspective. If Verizon hits Wall Street's estimates, its forward P/E of 14 is unusually low for the telecom giant. Verizon and AT&T continue to eat Sprint for lunch, and as long as that trend continues, I see no reason to ever bet against these telecom behemoths.

Patent portending?
Despite my constant griping about large pharmaceutical companies diving headfirst off the patent cliff in 2012, Novartis has escaped more or less unscathed. The company's hypertension drug, Diovan, is going to be a major loss this year. The drug accounted for $5.67 billion of Novartis' $56.8 billion in annual sales in 2011.

Perhaps what has investors concerned is the mass exodus in jobs in the biotech sector. Layoffs are becoming more prevalent, with Novartis shedding 1,960 jobs, or roughly 2% of its workforce, in response to Diovan's patent expiring. This is no AstraZeneca (NYS: AZN) , which has shed nearly 30,000 jobs over the past couple of years in response to an aging pipeline. But there's concern that while Novartis isn't losing many of its drugs to patent expirations, it's not exactly lighting it up in terms of pipeline production, either. I for one see moderate promise in the company's pipeline and would be hesitant in betting against the company here.

Throwing darts
Is it me, or can you just about throw a dart at almost any company in the gold sector and land on a brutally undervalued company? Barrick Gold is just one example.

Barrick's forward P/E of 7 places it well below half of its five-year average of 19, and it has followed Newmont Mining (NYS: NEM) in linking its dividend to the price of gold. Directly linking its dividend to gold prices allows investors another way of playing the gold market without having to physically buy the yellow metal.

I continue to feel that the entire sector is grossly undervalued and that physical miners are the way to play these historically high gold prices. For those feeling that the stock market may indeed be getting ahead of itself, gold miners could provide the perfect downside hedge, and Barrick seems like one of many amazing values. It's definitely not a company I'd bet against.

Foolish roundup
Cash flow tells the tale this week. Verizon, Novartis, and Barrick Gold all have extremely predictable cash flows and increasing dividends, which is a recipe that short-sellers would often be wise to avoid.

What's your take on these three stocks? Do the short-sellers have these stocks pegged, or are they blowing smoke? Share your thoughts in the comments section below, and consider adding these stocks to your free and personalized watchlist to keep up on the latest news with each company.

Also, if you'd like to avoid the potential pitfalls that high short interest can bring, I suggest you download a copy of our latest special report: "The Motley Fool's Top Stock for 2012." In it, our chief investment officer gives you the skinny on a company he has dubbed the "Costco of Latin America." Best of all, this report is completely free, but only for a limited time. Don't miss out!

At the time this article was published Fool contributor Sean Williams has no material interest in any companies mentioned in this article. He has no problem with patent expirations, but has the worst luck when it comes to warranties expiring. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.Motley Fool newsletter services have recommended buying shares of Novartis. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy that never needs to be sold short.

Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.


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