Is MGM Mirage (MGM) overbought?

In the last 3 months, shares of MGM MIRAGE (Public, NYSE:MGM) have pummeled the short interests,  with shares up 86%.

You'd think the Bears would be sleeping with the fishes at this point, but in fact, short interest has risen from 31.7M shares on 08/31 to 41M on 09/15.

Short Interest as % of Float is now up to 15%.

I'm with the Bears on this one. Here's why:

Debt, Debt and more Debt

MGM recently asked selected investors to lengthen the maturity of as much as $500 million in senior notes from next year to 2016. The lure was a higher interest rate – 10% versus 8.5%.

Unfortunately, there weren't enough takers. Even though MGM Mirage, which made the initial offer on Aug. 27, extended one deadline on Sept. 11, and amended the terms on Sept. 17

However, even if the debt-exchange had been successful, MGM Mirage would have had a long way to go. A late September report by Fitch Ratings points out that the company's "most significant credit hurdle" is the maturity of a $5.8 billion credit facility in 2011. As of June 30, the credit facility had $4.1 billion outstanding.

Fitch offered its comments after placing a "substantial credit risk" rating on MGM Mirage's recent issuance of $475 million in unsecured senior notes, due in 2018. Fitch added that MGM Mirage "may have enough liquidity" to take care of nearly $1.1 billion in debt coming due next year.

Turning to Valuation, MGM is looking pricey, at least when judged by certain measures: The casino sector now trades at 24.33 times expected earnings over the next 12 months versus 15.08 for the overall market, according to Bloomberg data.

Revenue per available room in Vegas will likely be $77 in 2009 versus $119 in 2007, estimates Bill Lerner, an analyst with Union Gaming Group.

Fellow Stockmasters, I can't stress this enough. If the market continues to tank as it did in the last week, the stocks that are going to get hit the hardest are the ones with high short interest. MGM, with its 15% short interest, is a prime target. Look to short down to the $8.50 level.

Disclaimer: Not positions in the stocks mentioned in this article