In recent quarters, a very clear trend has emerged among short sellers:

#-ad_banner-#As a group, they’ve lost the nerve to go after the market’s most richly valued stocks.

They’ve learned that focusing on the extremely rich multiples of many dot-com companies has caused many headaches, and you won’t find most of these firms at the top of the short interest lists these days.

Still, these high-flying Internet companies, which I panned earlier this month, often trade for absurd multiples of price to expectations for 2016 free cash flow, which may eventually come back to bite them.

Though the shorts are still steering clear of these stocks, long-oriented investors appear increasingly inclined to book profits as they start to drift away from their 52-week highs:

Notably, Facebook (Nasdaq: FB), Priceline.com (Nasdaq: PCLN) and Tesla Motors (Nasdaq: TSLA) all appear to have peaked about a month ago, dropping since by double digits, even as the Nasdaq flirts with new all-time highs. Of all of these stocks, I still think Twitter (NYSE: TWTR) and Priceline represent the greatest openings for short sellers looking to target frothy dot-com stocks.

Curiously, short sellers are going after the major tech firms that represent much better value. In just the first two weeks of March (for which data were released earlier this week), four tech titans with a combined market value of $600 billion — (Intel (Nasdaq: INTC), Microsoft (Nasdaq: MSFT), Cisco Systems (Nasdaq: CSCO) and Applied Materials (Nasdaq: AMAT)) — have seen a notable uptick in short-seller interest. Corning (NYSE: GLW) and Juniper Networks (Nasdaq: JNPR) have also come into sharp focus for short sellers.

Why now? The most obvious answer may be that short sellers anticipate a tepid set of quarterly results from these companies in April and May. The more likely explanation is that short sellers think IT spending levels in 2014 will prove disappointing.

After all, short sellers can’t make much of a case that these stocks have problematic valuations. Each firm produces massive amounts of free cash flow. Still, the surging short interest lends a note of near-term caution to these stocks, even as their long-term industry positioning remains quite appealing.

Of these stocks, Corning appears to be the most ripe for shorts. After all, this stock has posted an impressive 40% rally since mid-October, pushing the 2015 consensus EBITDA (earnings before interest, taxes, depreciation and amortization) multiple to nearly 10. That’s quite high for a cyclical company such as Corning.

Other Trends In Short Selling
Besides the short action that is taking place among the major tech firms (and not taking place with the too-risky-to-short dot-coms), several other intriguing trends emerged from the fresh short interest data released earlier this week.

I’ve been covering the ever-rising short interest for AT&T (NYSE: T), and it’s not worth a fresh mention except to note that shorts are digging in even deeper. The most heavily shorted stock on the New York Stock Exchange saw its short interest spike 13% sequentially in mid-March to 199 million shares.

I thought short interest levels in AT&T were alarming last summer, and they have doubled since then. It’s as if every major hedge fund that seeks to short stocks has a piece of the action here.

China Concerns
You can also see the growing anxiety about China’s growth reflected in a big short interest spike. From commodities producers such as Vale (NYSE: VALE), to the exchange-traded funds (ETFs) that target the country, short sellers are betting on an accelerating slowdown in the world’s second-largest economy.

Even as an major emerging-markets ETF, the iShares MSCI Emerging Markets Index ETF (NYSE: EEM), which holds a basket of companies that have significant exposure to China, has seen short interest rise.

Risks to Consider: As an upside risk, any of these heavily shorted names would get squeezed higher in a rising market, simply because their shorts are so crowded.  

Action to Take –> It’s clear that short sellers are focusing on two clear themes: A possible slowdown in IT spending in 2014 and louder grumbles emanating from China. It pays to watch how these trends play out as we head towards earnings season. If the shorts are right about the IT giants in particular, and they stumble badly in the coming earnings season, then that would set up one of the better value opportunities of the past few years.

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