It’s been a busy week for this analyst, and it’s not even earnings season yet. Earlier in the week, I looked over the latest data regarding heavily-shorted stocks, and was none too pleased to find several stocks in my $100,000 Real-Money Portfolio on the list. Not only are these stocks near the top of the leaderboard, in several instances the short interest level is actually growing. As a result, I’ve been spending my time checking and re-checking my assumptions for the current quarter, the current year, and the years ahead. 

Before I raise too many alarms, I should note that these also happen to be some of the most actively-traded stocks in general, and short-sellers often target large, liquid stocks as a proxy for broader market bearishness. Indeed, Ford (NYSE: F), Nokia (NYSE: NOK), Citigroup (NYSE: C) and Alcoa (NYSE: AA) are among the 11 most active stocks on the NYSE as of March 29. Still, why do they have to pick on my $100,000 Portfolio holdings?

It’s time to take a look at each of these four stocks to see what short-sellers may be thinking.

1. Nokia

This is the single most heavily-shorted stock on the market (in terms of absolute shares held short). It would take roughly eight days of average trading volume to liquidate all of the shares held short. That’s a large number for a stock that trades 32 million shares a day.

#-ad_banner-#Short sellers are likely betting that Nokia’s current efforts to establish a viable alternative smartphone platform to Apple (Nasdaq: AAPL) and Google (Nasdaq: GOOG) will fail. I have a more bullish view and think that Nokia can meet with at least moderate success. 

As I noted a month ago, “This is all about market share. Investors currently assume that the Lumia phones will make only a slight dent in Apple and Google’s hegemony. The next month or two will provide a series of data points regarding global carrier adoption, but it will likely be the summer or the fall before we can truly determine whether Nokia is on the path to a robust turnaround.” 

Since then, early signs are promising, but my fairly small 800 share position acknowledges that Nokia still has much to prove. If Nokia starts to deliver decent results, then that huge short position could serve as a major catalyst to the stock. 

2. Alcoa 

As is the case with Nokia, short-sellers can make a reasonable argument against Alcoa. Though I think this stock has tremendous long-term upside, I’m not thrilled with the aluminum industry’s market dynamics thus far in 2012. This is why I sold half of my position on March 13, noting that “aluminum may be headed for a pullback as… China now looks to be in a net export position in 2012, which is bad for aluminum prices.”

Sure enough, as aluminum prices dropped from $1.02 per pound to $0.96, Alcoa’s stock has pulled back below $10 in recent sessions (leaving me with a modest 6% gain for now). I’m keeping a close eye on Alcoa’s upcoming first-quater results. We have a clear sense of aluminum pricing, but we don’t know about volume. If sales come in below forecasts and shares take another hit, I’ll be looking to boost my stake in Alcoa, as I remain convinced that the multi-year outlook remains quite bright.

3. Ford 

Why short-sellers are targeting Ford is one of the great mysteries of the market. During the past 60 days, North American auto sales have been quite robust, leading a number of Wall Street firms to raise their industry sales forecasts.

Monthly domestic auto sales figures will be released on Monday, April 2. Research firm J.D. Power had predicted February sales would come in at 1.37 million units. Kelley Blue Book later weighed in with a forecast of 1.425 million. And Edmunds.com just weighed in with the latest projection of 1.45 million units. However it shakes out, we’re likely to see the highest seasonally-adjusted rate of car sales in roughly four years. If short sellers are looking for a sickly industry, they should look elsewhere.

On March 28, analysts at Citigroup issued an in-depth analysis of auto buying trends and concluded that a huge level of pent-up demand should push North American industry sales much higher in the next few years as well. And they’ve just added Ford to their “Top Picks Live” category of favorite stocks, noting that “Ford remains a clear leader in the context of our “new auto” fundamental thesis.”

Of course, Europe remains a huge challenge for Ford and other auto makers. Though Ford appears to be faring better than GM (NYSE: GM), Peugeot, Fiat and others, the company’s European operations are likely to lose money for at least the next few quarters. Short-sellers may be betting that the bad news out of Europe will overwhelm the goods news out of North America, but I think they’re wrong.

4. Citigroup 

Citigroup’s large short position is likely due to the stock’s huge trading volume. Indeed, the 38 million share short interest equates to less than one day’s worth of trading volume. Many investors remain dubious that banks are poised to deliver much better results any time soon. The improving economy may undermine that view as rising employment levels start to boost banking and lending activity. Still, this stock trades for just 75% of book value — even after a sharp rebound — so embedded expectations in this stock remain low anyway.

In recent weeks, several analysts have raised their profit forecasts for Citigroup for the first quarter, based on rising activity in the capital markets division. If the bank can exceed forecasts as it did in three of the past four quarters, then short sellers may look to cover their positions.

Risks to Consider: Short sellers often spot problems that many other investors miss. They also are willing to boldly bet against the economy, and if they’re right in concluding that the economy is set to lose steam, then these shares would likely fall in tandem with the broader market.

Action to Take –> It’s imperative that you watch the short position in stocks you own. Any time you see a rising short position, you need to dig in and find the potential negative factors on which short-sellers may be focusing. In these instances, I think short-sellers may be going after the wrong targets.

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