Theravance Inc (THRX), Sterling Bancorp (STL): Shorts Are Piling Into These Stocks. Should You Be Worried?

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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 number of shares sold short and see whether traders are blowing smoke or if their worry has some merit.

Company Short Increase March 28 to April 15 Short Shares as a % of Float
Agrium (NYSE:AGU) 185.7% 1.6%
GlaxoSmithKline (NYSE:GSK) 76.1% 0.2%
Provident New York Bancorp (NYSE:PBNY) 70.2% 2.9%

Source: The Wall Street Journal.

Growth, from the ground up
Personally, some trends just make sense. For instance, as baby boomers age, the need for specialized health care is only going to increase. Thinking along these same lines, I feel the need for more efficient and higher-volume-yielding crops is only going to fuel agricultural-based nutrient providers like Agrium over the long run.

Theravance Inc (NASDAQ:THRX)In recent months, weakness in potash prices has dragged down many companies in the sector. Potash, a type of fertilizer rich in potassium, has fallen from greater than $455 per metric ton in May of last year to just $390 as of the end of March. With China’s and Europe’s economies growing at a slower pace than in years past, potash producers like Agrium have attracted the ire of short-sellers.

But, as my Foolish colleague Dan Caplinger pointed out in March, Agrium has a trick up its sleeve because of its nitrogen-based fertilizer line. This secret weapon helped Agrium produce $2.1 billion in operating cash flow last year, allotting the company ample room for business reinvestment, and the ability to move from an annual dividend of just $0.11 per share in 2010 to a forward payout of $2 per share now. As long as crop yields remain constrained — and I don’t see how they won’t with a rapidly growing global population — crop prices will remain elevated and demand from farmers for Agrium’s growing solutions should be strong.

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