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 sold short and see whether traders are blowing smoke, or their worry has some merit.

Company

Short % Increase April 30 to May 15

Short Shares as a % of Float

Thompson Creek Metals (NYS: TC) 91.8% 11.1%
Western Digital (NYS: WDC) 133.3% 3.4%
H&R Block (NYS: HRB) 25.6% 6.3%

Source: The Wall Street Journal.


Till debt do us part
No one ever said developing a mine was easy, and Thompson Creek Metals understands this all too well. The company, which primarily mines molybdenum at the moment, is in the process of spending roughly $900 million to get its Mt. Milligan mine, which possesses 2.1 billion pounds of copper and 6 million ounces of gold, up and running.

However, in order to facilitate that process, Thompson Creek agreed to turn over a 40% stake in gold production to Royal Gold (NAS: RGLD) in exchange for $270 million upfront. It also earlier this month issued $200 million worth of debt to cover the costs of this project. As the Fool's metals guru Christopher Barker has stated, between Thompson Creek's operating cash flow, its cash, and its freshly raised funds, it should have enough cash to complete getting Mt. Milligan up and running by the fourth quarter of 2013.

Personally, I feel short-sellers are barking up the wrong tree, here -- but I'm probably biased, as Thompson Creek is a core holding in my portfolio. Given that the gold production alone could cover all mining costs at the new mine, it's not unrealistic to assume that Thompson Creek could earn north of $2 in EPS in 2014. I remain invested long and strong in what I feel is the most undervalued metals play out there.

In hyper drive
Usually when I see a stock trading at less than four times forward earnings, I think it must either be a Chinese small-cap or a questionable financial services company carrying a portfolio laden with poor-quality loans. Western Digital, on the other hand, is the exception to the rule.

The hard drive manufacturer's third-quarter results, released last month, absolutely crushed every analyst estimate out there. The company recently purchased Hitachi's Global Storage Technologies unit and demonstrated a 35% year-on-year rise in revenue, and just shy of a quadrupling in profit. The big news was that the average selling price for its hard drives was up, and gross margin nearly doubled to 35.5% from 18.2% last year.

Investors, however, want to examine every other possible flaw in this report, including pricing pressures moving forward and potential increases in capital expenditures. As for me, I see a company that's using its extremely strong cash flow to repurchase shares and strengthen its market share. Western Digital shares look like a genuine bargain at these levels.

E-file or e-fail?
It's an Internet party to file your taxes and everyone's invited ... except for H&R Block, that is. The prominent tax preparation services company recently ran through a gauntlet of bad news that included paying $28.2 million to settle its legal woes with the Securities and Exchange Commission, announcing the closure of 200 offices across the U.S., laying off 350 workers, and losing its chief financial officer.

To make matters worse, Intuit (NAS: INTU) , H&R Block's primary competitor and the maker of the popular tax software service TurboTax, reported third-quarter results two weeks ago that showed continued growth. Units sold during the tax season increased by 7%, yet Intuit CEO Brad Smith considered that result disappointing and felt his company could have done better. That's bad news for H&R Block, whose tax preparation online software is miles behind Intuit's TurboTax.

Short-sellers, H&R Block is all yours!

Foolish roundup
This week is a reminder to always look toward the future. Thompson Creek and Western Digital may not look great under their debt loads now, but with very low forward P/E ratios, they offer investors a substantial value. H&R Block, on the other hand, looks like it'll keep ceding market share to Intuit in the tax preparation space.

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 using the links below to add 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 owns shares of Thompson Creek Metals, but has no material interest in other any companies mentioned in this article. 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.The Motley Fool owns shares of Western Digital. 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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