NEW YORK - Some short-sellers predicted trouble for Enron, and they may have been the only people to walk away from that debacle with their pockets full and reputations untarnished. Still, the presence of short-selling--the practice of betting on a stock's decline by selling borrowed shares in the hope of purchasing them cheaper at a later date--doesn't always spell doom for a stock.
Take Marriott International (nyse: MAR - news - people ), for example. The Bethesda, Md.-based hospitality concern has seen its short interest (the amount of shares sold short but not yet repurchased) rise 43% from January to February. Short interest now equals 3% of Marriott's float, or the 196 million shares available to the public.
Marriott has had a good run in the market lately--perhaps too good for the shorts' taste. The stock has bounced 59% from a 52-week low and has outpaced the S&P 500's performance by 17 percentage points over the past year. It has advanced 11% since mid-February.
While short-sellers often target stocks in which they think the market is overexuberant, Todd Salomone, director of research at Schaeffer's Investment Research, a Cincinnati-based firm specializing in information for options trading and sentiment analysis, thinks that Marriott's scenario is potentially bullish.
Salomone deems it a positive when a stock manages to rally despite short-selling. If the stock continues to climb, the shorts could be forced to cover their positions by buying back the shares they've sold. Such a "short squeeze" could push the stock even higher.
As the example suggests, Salomone thinks upticks in short interest are a positive when they take place in the context of a bullish price trend. Salomone looks for signals such as a recent 52-week high, strong performance relative to the market or a share price above a 200-day moving average. Marriott satisfies the latter two conditions.
Full story at Forbes.com