Shorts Are Piling Into These Stocks. Should You Be Worried? E TRADE Financial Corporation (ETFC)

The best thing about the stock market is that you can make money in E TRADE Financial Corporation (NASDAQ:ETFC) 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.

Source: The Wall Street Journal.

Nemo bites back
I understand we’re talking about short-selling activity made roughly a month ago, but those are now looking like very prescient calls with winter storm Nemo socking it to the Northeast.

National Grid is an electric utility provider that operates electric and gas transmission lines in Great Britain, New York, and throughout New England. As you might expect, Nemo’s wrath, which followed that of Hurricane Sandy just months earlier, is wreaking havoc on electric utilities, which have been forced to dig deep into their pockets to complete repairs. The latest estimates from The Huffington Post as of this writing were that 650,000 people across the Northeast are currently without power. So the question is, do shorts have justification in betting against National Grid given the costly repairs about to ensue?

I’d say over the extreme short term, short-sellers may be in control as costs could creep up. However, looking at National Grid as an investment instead of a trade, there’s very little reason not to believe it’s heading higher. It’s one of the least expensive utilities around at 12 times forward earnings, and it boasts a near monopoly on the U.K’s gas pipelines and electricity wires according to my Foolish colleague G.A. Chester. Its global diversification allows for very consistent cash flow, which has translated into a very healthy 4.2% yield.

Fear and loathing among the brokerage industry
The S&P 500 may be at a five-year high, but that doesn’t seem to matter to investors who are making fewer trades at brokerage firms like TD AMERITRADE and E*TRADE Financial .