Editor's Choice

Fools Versus The Short Sellers

Eric is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

If the Fools are right, and the short sellers are wrong, several stocks could skyrocket when the short sellers cover. Finding these contrarian picks just required a simple screen with two parameters: stocks with five star CAPS ratings, and stocks with over 30% of the float short. If this theory holds, all 16 stocks that this screen returned after the market closed on Oct. 9 could bring in strong gains. Four stocks on this list had even more factors in their favor as well.

Paper-pushing pros
A clinic that spends less time on paperwork can dedicate more resources to treating patients, and a restaurant that spends less time on paperwork can dedicate resources to serving better food. CBIZ (NYSE: CBZ), with 39.6% of its float short, helps companies focus on what brings in the money by offering outsourced medical billing, accounting, and actuarial services. CBIZ shorts may be looking at the company's $272 million debt load and $3 million cash balance, but this service provider also has $60 million free cash flow to cover financing costs. CBIZ also missed on earnings last quarter, reported the Fool's Seth Jayson.

Accenture's recent earnings release illustrated the strong demand for outsourcing business services, which could be a good sign for CBIZ. Bloomberg reporter Sarah Frier explained that Accenture rallied 7.1% after raising its earnings estimates in late September. With a 0.58 PEG and a 1.06 P/B, investors don't expect much from CBIZ, so any future news could be good news.

Presto! A special dividend has appeared!
National Presto
(NYSE: NPK), with 35.7% short interest, might already be on the way back up after a $3.71-per-share gain on Monday, a 4.8% increase. National Presto's also got a strong balance sheet, with $119 million cash and zero debt. The bear case for National Presto involves the special dividends it regularly pays out, which give the company a trailing dividend yield of 7.4% right now.

Other companies typically use special dividends to distribute infrequent rewards, so National Presto's history of special dividend payouts is very unusual. Special dividend payouts aren't guaranteed, so Yahoo! Finance lists a 1.3% forward dividend yield for National Presto, which could confuse dividend investors. Bulls think National Presto will pay out a big special dividend next year again, so the company could effectively have a forward yield of 7% or more, even though financial sites list a much lower forward yield.

National Presto chose this unusual dividend arrangement so that it can reduce its dividend payments more conveniently if its earnings weaken. In the year ahead, military budget cuts could lead to weaker earnings for the company. Micah Martin, at GuruFocus, explained in an April article that ammo sales to the military provide much of Natural Presto's income, so Natural Presto depends heavily on one major customer. The shorts think that military cutbacks could mean fewer ammo sales for Natural Presto, so the bulls won't collect the upcoming special dividend they expect.

Nevertheless, Natural Presto's diaper and kitchen appliance businesses also bring in cash, and the company did report 19% higher sales this quarter. Natural Presto's earnings are coming up on Oct. 22, 2012, which could trigger a short covering rally if the numbers are good.

A better bet than Dunder-Mifflin
Office supply wholesaler United Stationers (NASDAQ: USTR), with 31.8% short interest, states in its 2011 10-K that office supply sales probably won't show strong growth any time soon, so the company has focused on making its distribution centers and other parts of its supply chain more efficient. United Stationers' $15 million cash balance and $530 million debt load aren't great, but this wholesaler does have $94 million free cash flow.

United Stationers did take a sales hit during the recession, but in 2011 its sales topped $5 billion, which improved on the $4.6 billion in sales the company reported in 2007. United Stationers also started paying a dividend in 2011. 8.8% earnings growth last quarter on 1.5% higher sales suggests that United Stationers' efficiency plans may have worked.

A cool future for carbon fiber?
Carbon fiber maker Zoltek (NASDAQ: ZOLT) got its name from founder Zoltek Rumy, who still leads the company. Founder leadership is often a good sign, especially when the founder buys stock back. A GuruFocus article on the Nasdaq site explains that Zoltek Rumy hasn't been the only insider buyer recently, but the article also explains that Zoltek reported losses in many recent years, which explains the short interest. 

Zoltek's 2011 10-K acknowledges the company's unprofitable past, proclaiming that finally Zoltek has something to celebrate. The annual report cover photo shows pictures of wind turbines floating in the sea, illustrating the main use for Zoltek's carbon fibers. In its annual report, Zoltek explains that there aren't any current alternatives to carbon fiber in large wind turbines, and the company is the main international carbon fiber supplier for large turbine builders, which could produce a decent moat.

As for future sales, Zoltek states that national clean energy mandates could force energy providers to set up wind farms, which could mean as much as 25% annual revenue growth. Zoltek isn't just blowing hot air here, as the company reported 24.6% revenue growth last quarter.

Which stock's least likely to fall short?
The screen found several promising stocks, especially carbon fiber maker Zoltek. Shorts that thought Zoltek would rack up more losses have already been proven wrong. Zoltek faces low competition in its main market. Zoltek's latest quarterly results show that an optimistic revenue projection was accurate, which could mean future revenue estimate beats, and this projection relied on a long term growth driver. Out of all of these stocks, Zoltek looks most likely to prove the short sellers wrong in an upcoming earnings release.


enovinson has no positions in the stocks mentioned above. The Motley Fool owns shares of National Presto Industries. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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.If you have questions about this post or the Fool’s blog network, click here for information.

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