Are Short Sellers On to Something at North American Palladium Ltd (PAL)?

Since everyone loves a winner, it’s reasonable to assume that everyone hates a loser — everyone but short-sellers, at least. These contrarian investors bet that hot stocks are primed to fall, aiming to turn their pessimism into profits.

Let’s look at platinum group metals miner North American Palladium Ltd (USA) (NYSEMKT:PAL), which, according to The Wall Street Journal, saw a 5% jump in shares sold short. That amounts to 4.5% of its float, so its short interest ratio is only two days to cover, or the number of days it would take to completely “cover” all the short position (i.e., buy back all the shares sold short). So don’t expect a short squeeze here, but let’s see if the miner still has the power to make short work of short sellers.

North American Palladium snapshot

Sources: wsj.com, FinViz.com. N/A = not available; NAP doesn’t pay a dividend

Just because the shorts are piling in doesn’t mean you should, too. Such stocks could have serious problems that warrant their short interest, but they might also just be stricken by short-term troubles. Only Foolish due diligence will tell you for certain.

The short story
The market for platinum group metals is moving into a period characterized by increasing demand. Both platinum and palladium are key metals used in a car’s catalytic converter system, with that component of the exhaust system accounting for two-thirds of palladium’s demand. Following the auto industry’s strong showing in January, where sales jumped 14% from the year-ago period, analysts are looking for automakers to hit 15.3 million vehicles sold in 2013, the first time since 2007 they’ve been that high. A recovering auto industry ought to translate into better pricing opportunities for the metal, and the upward pressure on palladium is already evident.

Although North American Palladium realized just $632 an ounce for the metal compared with $742 an ounce a year ago, palladium prices today are above $766 an ounce, the highest it’s been in 17 months. It’s also unmistakable in two exchange-traded funds — ETF Securities Physical Platinum Shares and ETF Securities Physical Palladium Shares , which, as their names suggest, invest in the bullion of the metals — that have seen their unit values rise 20% and 32%, respectively, over the past six months.

Upsetting the apple cart
Another factor contributing to palladium’s rise is concern that supplies may be disrupted. Anglo American, the world’s biggest platinum miner (but which produces platinum, too, since the metals are often found together), is cutting production in South Africa 20% this year in a bid to shore up profitability. The country itself is the world’s largest producer of the metal and expects to see production fall 3.4%, worsening an already existing supply imbalance. Russia, which for four decades accounted for as much as 15% of global demand, indicated that it may stop sales altogether within two years, further limiting supply and pushing prices higher.

Those factors can only bolster the profit potential of North American Palladium and its primary rival, Stillwater Mining Company (NYSE:SWC), whose reserves are located in North America.

Up, up, and away!
With demand growing, supplies worsening, and fears over scarcity all conspiring to push prices higher, North American Palladium has already gained more than 50% since I forecast a turnaround in December, and I don’t see the run ending yet. Because Stillwater has diversified its operations heavily into copper and other metals, NAP is the real pure play here. It’s expanding its operations to further reduce its cash costs per ounce — actions that should drop right to the bottom line — and is part of the reason I believe there’s more ground to make up in the months ahead.

Don’t sell yourself short
Share your views below on whether short sellers should be squeezed till it hurts, or if the stock ought to be shorted till the sun doesn’t shine.

The article Are Short Sellers On to Something at North American Palladium? originally appeared on Fool.com and is written by Rich Duprey.

Fool contributor Rich Duprey and The Motley Fool have no position in any of the stocks mentioned.

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