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 amount of shares sold short and see whether traders are blowing smoke, or if their worry has some merit.
|Company||Short Increase Dec. 14 to Dec. 31||Short Shares as a % of Float|
|Trulia Inc (NYSE:TRLA)||90%||23.3%|
|Workday Inc (NYSE:WDAY)||32.7%||13.3%|
|Cobalt International Energy, Inc. (NYSE:CIE)||84.9%||5.4%|
Real estate, fictitious valuation Trulia, a real estate research website that assists prospective home buyers with pricing and neighborhood information, might need to spend some time educating its investors about speculating in its rapidly growing, yet still unprofitable, bottom line.
Growth isn't a problem for Trulia, as the online real estate site reported a 76% rise in total revenue as mobile traffic increased 129%. What is a problem is its current lack of profits, and a lot of looming competition, specifically from Zillow Inc (NASDAQ:Z) .
Even with its first quarterly EBITDA profit of $0.3 million, Trulia has yet to turn in a bottom-line profit. That's a concern for a company valued at 10 times sales and better than 130 times next year's earnings. The housing market is improving and lending rates do remain low, which is spurring buyers to make a move and helping Trulia's revenue grow, but what exactly is going to happen in 2015 when rates begin to rise? My guess: a rapid decline in Trulia's revenue.
Also, Trulia and its peer Zillow have very little differentiation between what they offer the user, and the barrier to entry in the sector is low, which makes me question the overall longevity of both business models. Given a weak forecast from Zillow and Trulia in November, I'd just as soon avoid this expensive sector altogether and let the short-sellers have their way.
Can we manage a profit? One of the biggest keys to being successful in garnering cloud-computing dollars is focusing on an area with currently unmet needs -- and trust me, it isn't as easy as it sounds. Workday, an enterprise-based cloud company focused on human capital management needs, does just this by providing services many of its peers, like Automatic Data Processing (NASDAQ:ADP) or SAP AG (NYSE:SAP), cannot.
I can't deny that its cloud offerings reduce the need for updates or that they're growing like wildfire in the business sector, but not even in my wildest dreams can I imagine this company supporting a valuation of 36 times trailing-12-month sales figures.
As I opined when I featured Workday as my CAPScall of the Week in October, the company's S-1 prospectus clearly stated that its focus is on expansion and not profits. So while revenue growth is projected to increase by 74% to 83% in the upcoming quarter, profits will remain elusive for what I expect could be at least two or three more years. By then, Workday's competition will have had time to catch up and investors may be left holding a still unprofitable cloud company valued at north of $8 billion. Thanks, but no thanks!