The Allstate Corporation (ALL), Stryker Corporation (SYK): The 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 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.

Source: The Wall Street Journal.

In good hands
It isn’t hard to understand why short-sellers have piled into property, casualty, and life insurer The Allstate Corporation (NYSE:ALL) in recent weeks: Its share price has doubled over the past 16 months, which is no easy feat for an insurance company. It’s even more impressive if you consider that this amazing run comes after two catastrophic events in back-to-back years — the tornado outbreaks of 2011 and Hurricane Sandy of 2012. In spite of this huge run, I’m still convinced that short-sellers are barking up the wrong tree by betting against The Allstate Corporation (NYSE:ALL).

In the fourth quarter, The Allstate Corporation (NYSE:ALL) investors witnessed profits tumbling 45% as the company’s property-liability combined ratio (a measure of how profitable it is to underwrite policies) rose to 101.7% from 90.9% in the year earlier — a figure under 100% would signify profitable underwriting. This was a direct response to a spike in claims related to Sandy, but it wasn’t out of the ordinary from the figures we’ve seen with Allstate peers. P&C insurer The Chubb Corporation (NYSE:CB), for instance, really took it on the chin with a loss of nearly $900 million from Hurricane Sandy, which wiped off about $2 in EPS from its bottom line.

Even including the effects of Hurricane Sandy, property-liability net premiums rose 3.3% to $6.64 billion, which was well ahead of estimates. What this shows me is that Allstate is luring in new customers with its somewhat aggressive advertising campaign, and it’s easily able to boost premium pricing. The interesting thing about catastrophe losses is that they’re often short-lived as they give insurers a justifiable reason to boost premiums. At less than 10 times forward earnings, Allstate is not a company I’d dare consider betting against.