They lend skepticism to the market. They warn. They give you a head's-up even if it means keeping you out of stocks that are momentarily hot or have strong adherents that get too excited and lack discipline.
Yesterday's action in this tumultuous market demonstrates the need to keep track of what short sellers have been saying. Let's tick down the list.
First, there's Fossil (FOSL). There's been no doubt that Fossil's been a rocket ship; it's been an amazing performer over the years. But shorts have repeatedly warned that its accessory business has always been faddish and would eventually run out of steam, not unlike Deckers (DECK), with its Uggs. We found out that Fossil has indeed hit a wall, even if it is a European wall. The shorts nailed it.
Second, there's Mako Surgical (MAKO), which has pioneered a robotic system for knee and hip surgery. Here's one that many bulls have tried to analogize to Intuitive Surgical (ISRG). Like Fossil, it's been red hot, but the bears have been wise to it. How do we know? Because almost a third of the float has been short. Yesterday we learned that the string has run out with a huge revenue shortfall. The warnings from the shorts proved true.
Third, there's the curious case of Rackspace (RAX), which as a manager of data warehouses has been trading positively along with all the cloud plays like Equinix (EQIX), F5 (FFIV), Citrix (CTXS), and Salesforce.com (CRM), all of which have turned in some stellar earnings. Herb Greenberg of CNBC has repeatedly warned that Rackspace will eventually be hurt by having to spend too much money on what will amount to a commodity business. Herb's no short seller; like other reporters, he can't trade stocks. But he sorts through a ton of data, including those of short sellers, and has filtered through the clutter and flagged these warnings. Rackspace basically confirmed those worries. It was hammered.These stories remind me of Green Mountain Coffee (GMCR), where short sellers very publicly--and presciently--warned of a slowdown. We learned that the chairman of the company sold 5 million shares because of a margin call. He may have been a believer, but the shorts knew better.
Finally, shorts have repeatedly warned that Dendreon's (DNDN) Provenge, touted as a breakthough treatment for prostate cancer, would not be adopted with the alacrity that the incredibly bullish boosters had claimed. The company said growth would be modest and reported a loss that was larger than people expected.
Now short sellers can be wrong, as wrong as anyone who tries to predict the direction of a stock. They can be early, as many of the stocks I have mentioned here had been fabulous performers, not unlike Netflix (NFLX), Deckers, and Research In Motion (RIMM) before their downfalls. They often target expensive stocks even when there's no flaw, and they've been burned for that.
But their function is a good one, and the skepticism they engender can make us all better investors.
Disclosures: Cramer's charitable trust has no positions in the stocks mentioned.
