Do the Shorts Know Something You Don't?

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 and aim to turn their pessimism into potential profits.

These companies on the American Stock Exchange were among those with the largest percentage increases in shares short. Combining that with the collective intelligence of Motley Fool CAPS, we'll see which of these companies Fools believe have the power to make short work of short-sellers.

Company

Shares Short, May 31

Shares Short, May 13

% Change

%   Float

CAPS Rating (out of 5)

Neoprobe (AMEX: NEOP  )

7.7

6.0

28.2%

9.2%

*

VirnetX Holding (AMEX: VHC  )

8.7

7.5

15.1%

24.5%

*

Paramount Silver & Gold (AMEX: PZG  )

4.0

3.5

14.8%

3.6%

***

Source: wsj.com. Share counts in millions.

Of course, this isn't a list of stocks to buy -- or short! These stocks could have serious problems that warrant their short interest, but they might also be stricken by short-term troubles. Only Foolish due diligence will tell you for certain; our 170,000-strong CAPS community offers just such a good place to start.

The short list
Hedge funds are already a widely despised group of investors because of their short-selling strategies, but one hedgie is taking the practice a significant notch higher by actively trying to make the stock fall to achieve a profit.

MSMB Capital Management is trying to thwart Neoprobe's effort to get an FDA review of its lymph node mapping agent Lymphoseek. The hedge fund says there were "severe deficiencies and flaws" in two late-stage clinical trials, so it filed a "citizen petition" with the FDA to undermine the application review process. A successful challenge would undoubtedly cause Neoprobe's shares to crater.

MSMB isn't winning its industry any fans by doing this, but in reality it's a fairly common process. Teva Pharmaceuticals (Nasdaq: TEVA  ) , Pfizer (NYSE: PFE  ) , and ISTA Pharmaceuticals have all filed citizen petitions over the years to try to derail FDA reviews that might have had an impact on their own profits. It's just MSMB's direct, financial gain that appears so unseemly.

Others have raised questions about Neoprobe's trials, and more than two-thirds of the CAPS All-Stars rating it have doubts about the probability of its success. Let us know in the comments section below whether you think the Neoprobe can test higher levels again.

You, sir, are no Qualcomm
Short sellers are probably disagreeing with the analysts at Cowen & Co. who characterize VirnetX Holdings as a latter-day Qualcomm (Nasdaq: QCOM  ) . The idea is that the patent portfolio of the 4G security specialist is similar to the trove held by the wireless telecom services provider at the dawn of the 3G age. Much has been made of its wrangling $200 million out of Microsoft in a patent-litigation settle, but the piling on here would suggest that it's much ado about nothing.

The CAPS community is also skeptical, as just 55% of those rating it see it going on to beat the indexes, while All-Stars have lined up against it, with nearly three-quarters seeing it coming up short. You can add VirnetX to your watchlist if you're interested in learning more about its progress, and you can share your thoughts on the VirnetX Holdings CAPS page.

Glittering gains
Considering Paramount Gold & Silver has tripled off its 52-week lows, short sellers must be thinking it's come too far, too fast. But there are plenty of factors still in place that could drive precious metals higher.

Federal Reserve Chairman Ben Bernanke has been left scratching his head over why the economy is stuck in a rut, even though he's unloaded his bazooka at it and kept interest rates near 0%. Now with inflation on the move, the Fed has scaled back its estimates on economic growth.

Paramount's wholly owned San Miguel project in Mexico is an extension of the world-class silver and gold Palmarejo mine owned by Coeur D'Alene Mines  (NYSE: CDE  ) . But CAPS member azpat0 has stated that one of Paramount's biggest assets is its management team, and the broader investor community apparently agrees, as 94% of those rating the precious-metals miner believe it will outperform the broad market averages.

Add the stock to the Fool's free portfolio tracker to find out how Paramount Gold & Silver hedges its bets in the future.

Don't sell yourself short
It pays to start your own research on these stocks on Motley Fool CAPS. Read a company's financial reports, scrutinize key data and charts, and examine the comments your fellow investors have made, all from a stock's CAPS page. Then share your views with the CAPS community: Squeeze 'em till it hurts, or short 'em till the sun don't shine? May the best argument prevail!

The Motley Fool owns shares of Teva Pharmaceutical, Qualcomm, and Microsoft. Motley Fool newsletter services have recommended buying shares of Pfizer, Microsoft, and Teva Pharmaceutical, as well as creating a diagonal call position in Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Fool contributor Rich Duprey has no financial position in any of the stocks mention in this article. You can see his holdings. The Motley Fool has a disclosure policy.


Read/Post Comments (11) | Recommend This Article (5)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 23, 2011, at 5:23 PM, brewvestor wrote:

    NEOP - The company vetted its trial design through the proper FDA committees and divisions. All indications are that the trials were designed correctly and (importantly) no one has argued that Lymphoseek didn't meet the primary objectives of the trials.

    It is a solid company with good management (something you don't always find in small-development biotechs). It is in a solid financial position.

    The only thing the short did was create confusion in order to profit off a short term trade. That's the risk with small biotech companies with a large retail investor base.

    When the FDA accepts the NDA filing in the 3rd quarter the path will become even more clear.

  • Report this Comment On June 23, 2011, at 5:58 PM, mbarry0520 wrote:

    NEOP - What's interesting is msmb appears to have been set up for the sole purpose of shorting this stock.

    Its amazing to me that his approach is legal (his analysis is thoroughly flawed to the point of being completely made-up nonsense) -- even MORE amazing -- his approach seemed to work.

  • Report this Comment On June 23, 2011, at 8:34 PM, tjsimone wrote:

    Rich-

    You and Anders really do your best to Knock VHC, every chance you get, dont you...

    You guys, however, are just computer traders, checking on ratios, and are clueless on the technology...

    Maybe if you had done your DD, you would have found this @ 5, and have a 5 badder in a year.,..

  • Report this Comment On June 23, 2011, at 8:35 PM, tjsimone wrote:

    Bagger

  • Report this Comment On June 23, 2011, at 10:36 PM, Kelleyhouse wrote:

    Rich,

    I have been a NEOP long, buying my first shares in March of 2009 at 0.52. and accumulating since. I just checked my account this evening and I am sitting at an 180.51% gain. To be fair, run that number against some of the responding CAPS or All-Stars community returns. As respectfully as I can say, I believe they have not done sufficient DD regarding Neoprobe, Lymphoseek, or Martin Shkreli and MSMB Capital to render such a percentage as 55%?? Dig deeper into Neoprobe and Lymphoseek and you will find a Company preparing to submit an NDA for final approval to the FDA. An approval backed solidly by science, doctor's, and successful full phase clinical studies. A company preparing a 2nd drug with clinically significant findings for the same. Contrast that to as gracefully as I can say....digging deeper into all of the recent names, intent and reasons for the bearishness, and you will see why my 180.51% gain is only surely to rise substantially from here.

    Thanks,

    Kelleyhouse

  • Report this Comment On June 24, 2011, at 7:57 AM, TMFCop wrote:

    tjsimone,

    Methinks you see what you want to see without actually reading. Highlighting a negative opinion doesn't necessarily mean I agree with it. It means the person offered an interesting point of view worthy of consideration. I have no financial interest in VHC whatsoever, and most decidedly am not a trader.

    I recommend you read a few of the other articles I've written about VirnetX and then decide if I really spend all my time trying to knock the company:

    http://www.fool.com/investing/general/2011/06/02/whoa-what-j...

    http://www.fool.com/investing/general/2011/04/13/why-did-my-...

    http://www.fool.com/investing/general/2011/04/01/3-stocks-sh...

    http://www.fool.com/investing/general/2011/03/30/3-stocks-st...

    I think you'll find I don't have a hard and fast opinion about the company. It's got a patent portfolio that could be valuable and lucrative, but patents are only good until someone comes a long and makes something new or better. It needs to continue improving.

    I'd suggest not getting married to your stock and be willing to use the opportunity of a negative opinion to revisit your own reasons for buying. If they still hold up, well then that's all the better for you. But if not, then it can turn into a fruitful exercise.

    You just can't get all excited though because someone says something you don't like. It's not conducive to your long-term financial well-being. Becoming emotionally attached to your stocks will ensure you make exactly the wrong decision when it's most important.

    Thanks for reading, cheers!

    Rich

  • Report this Comment On June 24, 2011, at 8:06 AM, TMFCop wrote:

    NEOP longs,

    Yeah, I'm not sure I agree with the critics about NEOP's clinical trials. I think management's critique that they're following what the FDA allows -- you can't test against off-label procedures -- is the crux here.

    The problem, though, is whether doctor's think the off-label procedure will be better than what NEOP is proposing. I'll admit to not completely understanding all the science about what's going on here, but I do think there is opportunity here. It's just how much that I'm not certain about.

    And as for MSMB, the attempt to directly influence the process is just so shady looking. Sure it's a well-worn process undertaken by others protecting their revenue stream, and the FDA can better judge the competing claims (though I do have tons of reservations about the FDA itself), but betting against the stock and then trying to influence a decision is a tad different than protecting what's yours.

    Cheers,

    Rich

  • Report this Comment On June 24, 2011, at 10:02 AM, brewvestor wrote:

    TMFCop - All biotech drugs have to deal with the issue of market acceptance. That is not unique to NEOP or any other biotech company. The company has planned Phase 4 trials (post approval) for marketing purposes (they said they were going to do that over a year ago).

    If you actually reaseach the clinical development of Lymphoseek the clinical benefits are clear. Of course, there is always risk that the market studies NEOP and Cardinal Health have conducted are not right on point. Based on my review of them I think they may be conservative.

    Everyone has their own opinion. However, MSMB did not attack NEOP with legitimate questions. His sole purpose was to create temporary confusion which he could exploit for a short term trade.

    In the case of small biotechs it is easy to create confusion because you have to do a lot of research just to understand the arguments. As has been clear by the stock price lately (and your comments) all it takes to create temporary confusion is to put out an article on Seeking Alpha and file a (free) Citizen's Petition which both have flimsy arguments.

    Its kind of sad that's all it takes. But, for investors that choose to dig deeper in the company and not rely solely on Seeking Alpha and Wall Street rumor for their due dilligence it created a good buying point for the stock.

  • Report this Comment On June 24, 2011, at 3:16 PM, dantessecret wrote:

    this is what's out about msmb, the so called hedge fund who can't even keep its website going:

    https://sites.google.com/site/vatsire/Searching-for-Martin-S...

  • Report this Comment On June 24, 2011, at 3:17 PM, dantessecret wrote:

    and look at the rest of the millions of shares that are long. so what?

    this gives blogging a bad name.

  • Report this Comment On June 27, 2011, at 3:27 PM, HalDaniels wrote:

    With regards to MSMB and NEOPROBE. I don't own shares in either company. I do find it extremely curious in this day and age of SEC's overviews of potential "insider trading" and "stock manipulating" that the FDA would even accept such an item as "citizen petitions" from an outsider that stands to directly profit from a stock that loses share value due to input from an admitted profiteer. Did MSMB have to state in their citizen petition thay are shorting the stock and that's why they're submitting the citizen petition?

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