Although short selling -- the practice of selling borrowed shares with the hope of repaying the loan by buying back the shares at a lower price -- goes against the American belief that stocks always go up, I have long been fascinated with it. Short Stories discusses what works, what doesn't, and what some of the leading lights in shorting stocks think about its opportunities and threats. I describe possible short trades and I seek your comments and questions for story ideas. I don't offer any investment advice and I don't trade on any of the posts I write.

If you had followed my suggestion back on April 4th to sell short shares of Coast Financial Holdings Inc. (NASDAQ: CFHI) -- when it traded at $6.90 -- and cover your position on Monday morning at $3.90, you could lock in a return of 77% -- pretty good for about six weeks' risk.

Based on my analysis of its first quarter 2007 10Q filed May 10th, here are the reasons why I think CFHI has tumbled:

• Net loss increased 7.7 times. CFHI's Q1 2007 net loss of $2.4 million was 7.7 times its net loss in Q1 2006.
• Provision for credit loss up 11-fold. CFHI's Q1 2007 provision for credit losses of $1.4 million was 10.7 times its Q1 2006 provision. Meanwhile its nonperforming loans increased 38-fold to $38 million in Q1 2007.
• Many loans to bankrupt developer. CFHI's construction-to-permanent loan portfolio was hit by the downturn in the Florida real estate market and the failure of a local builder -- Construction Compliance -- with whom many CFHI borrowers had contracts to build their homes.
• Regulatory investigation of CFHI's operations. The FDIC and Florida bank regulators have recently completed an examination of CFHI and "are conducting an ongoing investigation of its operations."
• Shareholder lawsuits. CFHI is being sued by shareholders who allege that it "materially mislead the investing public by issuing false and misleading statements and omitting to disclose material information concerning CFHI's operation and performance of its residential lending department, particularly as it related to these loans."

And while I would not fault an investor who chose to take a 77% profit by covering an April 4th short position on CFHI, I think it will decline further. Do you agree? Do you have any short candidates you'd like me to examine?

Peter Cohan is President of Peter S. Cohan & Associates, a management consulting and venture capital firm. He also teaches management at Babson College and edits The Cohan Letter. He has no financial interest in Coast Financial.

MOST NOTEWORTHY: The Kroger Co (KR) and Quest Diagnostics Inc (DGX) were today's most notable upgrades:

• Bank of America upgraded The Kroger Co (NYSE: KR) to Buy from Sell with a $29 target. Due to streamlined distribution and reduced SG&A expenses having closed the productivity gap with Wal-Mart Corp (NYSE: WMT), the firm believes Kroger is well positioned to accelerate growth and modestly increase operating margins.

• JP Morgan upgraded shares of Quest Diagnostics Inc (NYSE: DGX) to Overweight from Neutral as they not only believe the company's results will outperform expectations over the next few quarters, but that management will become more aggressive in the acquisitions market.

OTHER UPGRADES:

• Sterne Agee upgraded Coast Financial Holdings Inc (NASDAQ: CFHI) to Hold from Sell, with an $8.50 target.

• Goldman Sachs upgraded shares of Nova Chemical Corp (NYSE: NCX) to Neutral from Sell, with a $12 target, citing the potential sale of Nova's styrene business.

• Citing the possibility of a merger with Abitibi-Consolidated Inc (NYSE: ABY), Bowater Inc (NYSE: BOW) was upgraded to Neutral from Sell at Bank of America and to Buy from Hold at Soliel Securities.

Analyst summaries provided by TheFlyOnTheWall.com (subscription required).