For my target keyword I am ranking as #1. Lately I've started seeing strange backlinks (lots of them) in Google Webmaster Tools.
I suspect one of my competitors is doing it to potentially screw up our rankings. It's a lot of work going through each link manually and using Google's disavow tool.
Realistically, could a competitor screw up our rankings by buying a few thousand spammy links?
Theoretically, yes. Google claims it's not an issue, but they also encourage use of the disavow tool.
If you're having an issue with needing to disavow a lot of links, I'd recommend finding a tool that can help automate the process. Some quick Googling turns up http://www.rmoov.com/ as something that can help, but I'd look to see what other options there are. An hour from a virtual assistant every week could be another way to go.
Yes, it is indeed possible to do negative SEO on your competition. Even though Google states otherwise.
The problem is that for larger sites with a vast amount of established authoritative backlinks, it's tough for a competitor to screw up their rankings.
For the little guys though, all it takes is a $5 gig on Fiverr to have an effect on your competitor's bottom line. Which is both scary and sad at the same time.
The only recourse is disavowing back links in Google Webmaster Tools, but I have seen sites that don't completely recover in traffic even after disavowing "bad" backlinks.