Shorts Are Piling Into These Stocks. Should You Be Worried?
Jun 25th 2012 11:42AM
Updated Jun 25th 2012 11:50AM
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 whether their worry has some merit.
Short % Increase May 15 to May 30
Short Shares as a % of Float
|CBS (NYS: CBS)||61.3%||2.3%|
|Chiquita Brands (NYS: CQB)||63.3%||13.3%|
|K12 (NYS: LRN)||20.3%||39%|
Source: The Wall Street Journal.
It shoots, it scores!
Three years ago, you couldn't pay me to touch a media company, as many had debt levels that would have scared away even the riskiest investors. Today, CBS stands among the media's elite following its eighth straight quarterly earnings beat in early May.
In that first-quarter report, CBS recorded an 86% increase in earnings on the back of a 12% rise in sales. Higher advertising revenue from the NCAA college basketball tournament and a spike in content licensing -- particularly with regard to digital streaming and syndication -- boosted its results.
Strength from CBS really shouldn't be a surprise because we also recently were privy to impressive results from Disney (NYS: DIS) . Even excluding the positive effect The Avengers' successful debut will have on earnings, Disney's media and theme park results are booming, which has given a green light to growth across the entire sector. Tack on the prospect that political ad revenue should be strong this year given such a closely contested U.S. presidential race, and you have a recipe for continued gains for CBS.
Chiquita slips and falls
Shareholders of Chiquita Brands are themselves going bananas, trying to figure out when the stock's current slide in share price might come to an end.
Chiquita's first-quarter report wasn't pretty and is the primary -- but not only -- culprit as to why its share price has dropped. Chiquita's first-quarter profit of just $0.04 badly missed the mark (by 87%) of what analysts had expected and prompted Wall Street to drastically lower fiscal 2012 profit projections for the company. Chiquita blamed the weakness on higher fuel costs and lower euro exchange rates despite stability in its U.S. operations. In addition, banana workers in Latin America are suing Chiquita and Dole Food (NYS: DOLE) over the possibility of being exposed to a pesticide that these companies allegedly knew about and didn't provide workers proper protection against.
Management commented that the actions it's taking to stabilize Chiquita's banana operations and grow its salad segment will take time -- not exactly what investors wanted to hear. However, all things considered, if Chiquita can stave off inflationary costs and successfully turn around its salad business, then it could represent a compelling (yet still risky) turnaround candidate while trading at just 27% of book value.
The dunce cap
Between the rising cost of educating America's youth and the possibility of greater government regulation with regard to for-profit education companies, education stocks are about the last area I can think of where I'd want my money at the moment. Technology-based educational software proprietor K12 is making that decision is even easier for me.
Whereas CBS is riding an eight-quarter streak of earnings beats, K12 has missed Wall Street's estimates in seven consecutive quarters! As K12 looks to expand its customer reach and network, it's had to radically boost spending to account for higher administrative and general expenses. Case in point, in the third quarter, K12 reported a 37% rise in sales, but also recorded increases of 36% and 46% in instruction costs and selling, general, and administrative costs, respectively. Without the ability to control costs, this is a company I'd have no trouble sending to the corner for an extended time-out.
I'd like to title this week, "What have you done for me lately?" Simply put, CBS has been crushing estimates, K12 has continuously failed to meet estimates, and Chiquita has produced a mixed bag.
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!
The article Shorts Are Piling Into These Stocks. Should You Be Worried? originally appeared on Fool.com.Fool contributor Sean Williams has no material interest in any companies mentioned in this article. He never needs a dunce cap. 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 Disney. Motley Fool newsletter services have recommended buying shares of Disney and K12. 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.