The Nasdaq's 5 Most Hated Stocks

The tech-heavy Nasdaq Composite (NASDAQINDEX: ^IXIC  ) might be the only of the U.S.'s three primary indexes not to reach all-time highs in 2013, but it's by far the best performer among the group, up 18.3% year to date.

We're seeing a number of factors helping out the Nasdaq's largest companies, but historically low lending rates in particular have allowed enterprises to refinance existing debt and/or use that debt to finance business expansion. So long as the Federal Reserve continues its favorable monetary policy, the sky could be the limit for the Nasdaq.

On the other side of the coin are the skeptics licking their chops and waiting to pounce on multiple Nasdaq companies that could be slammed if the Fed scales back its monetary easing, known as QE3, before the year is out. As we've done in previous months, I propose we examine the five most hated Nasdaq stocks (i.e., the stocks with the highest short interest), determine what it is about them that makes them universally disliked by pessimists, and decide whether these short-sellers are justified in their pessimism.

Company

Short Interest as a % of Shares Outstanding

GT Advanced Technologies (NASDAQ: GTAT  )

43.63%

Outerwall   (NASDAQ: OUTR  )

40.23%

Uni-Pixel (NASDAQ: UNXL  )

35.41%

NII Holdings

34.83%

Dendreon (NASDAQ: DNDN  )

33.17%

Source: S&P Capital IQ.

Source: Fernando Tomas, Flickr.

GT Advanced Technologies
Why are investors shorting GT Advanced Technologies?

  • Solar panel equipment provider GT Advanced Technologies, a.k.a. GTAT, climbed the mountain in June to become the most disliked stock within the Nasdaq Composite. The reason short-sellers have dog-piled GTAT has to do with its ties in providing solar equipment to the Chinese solar-panel industry. Chinese solar producers are in cash-conservation mode, which means little research and development is being conducted. That means instead turning to GTAT to supply components for solar panels. With U.S. solar companies crushing Chinese panel-makers in recent months, pessimists are betting on a slowdown in orders for GTAT.

Is this short interest deserved?

  • There are reasons to be a bit skeptical of GTAT's growth if Chinese solar companies begin to fold under the pressure of debt. However, until we see that happen, GTAT's products should remain in high demand. Chinese solar-panel manufacturers have little regard for margin, so their answer to simply produce as much as possible in many cases works in GTAT's favor. At roughly 11 times next year's earnings, I feel GTAT could surprise short-sellers in a bad way.

Outerwall
Why are investors shorting Outerwall?

  • Don't let the name fool you -- Outerwall is merely the new name for Coinstar, the company best known for its Redbox DVD rental kiosks. The pessimism building around Outerwall has to do with the declining number of consumers that use DVD rental services, opting instead for the convenience and speed of streaming content. Although Outerwall's revenue held up in its latest quarter, that was only after the addition of new DVD kiosks. In other words, same-kiosk sales are falling. 

Is this short interest deserved?

  • Some investors see Outerwall as the ultimate value play. As for me, it's nothing more than a glorified value trap. Its DVD rental business accounts for nearly 90% of total revenue, and on a per-kiosk basis it's declining. Saturating the market will only further exacerbate costs. Unless Outerwall devotes its efforts to a streaming transition, it will likely be cash-flow negative within five years by my best "guestimate." Without so much as a dividend to tickle value investors' fancy, I'd strongly encourage passing on Outerwall.

Uni-Pixel
Why are investors shorting Uni-Pixel?

  • Occasionally the "coolness" of a new product gets the better of investors. That seems to be the case with shareholders in Uni-Pixel, who have been on an unforgettable ride over the past 52-weeks from a low of $5 to as high as $41, then back to a current price around $12. The company's flexible electronic film and a partnership opportunity with Eastman Kodak are what set investors off, but the potential for competition from Apple is what put hope-filled investors back in their place. Now, Uni-Pixel has a more pressing worry: a handful of shareholder-based lawsuits directed at the company.

Is this short interest deserved?

  • I stated in March that short-sellers should take a hard look at Uni-Pixel, and if they had taken a position, they would be up more than 50%. For a company that made just $76,000 in the entirety of fiscal 2012, there were far too many questions about expanding its UniBoss line. There were even greater concerns, given these higher expenses, that it would be able to turn a profit. Until we see demonstrable results from Uni-Pixel and a settlement to its countless lawsuits, I'd suggest looking elsewhere.

NII Holdings
Why are investors shorting NII Holdings?

  • It's not hard to see why the pessimism in South American wireless service provider NII Holdings has been building if you examine its last four quarterly reports, which reveal EPS misses of 1,100%, 60%, 185%, and 86% -- yuck! Blame it on increased competition and oversaturation in Brazil, as well as the higher costs of deploying a 3G network, but NII Holdings has delivered only increasing losses to shareholders over the past year. Its most recent quarter highlighted a 13.5% decrease in revenue as churn rates increased and average revenue per user decreased.

Is this short interest deserved?

  • I don't see how this growing pessimism isn't deserved. The company has reversed profits into huge losses, its churn rates are rising, and it's generating less money from its users compared to last year. Expanding its 3G network is a necessary step for its evolution in Brazil, but that's already a crowded wireless market. Until you see definitive improvement in NII's bottom line, I feel you need to steer clear of this stock.

Dendreon
Why are investors shorting Dendreon?

  • Short-sellers have been piling into biotechnology firm Dendreon because the sale of Provenge, its only treatment approved by the Food and Drug Administration, hasn't gone well. Provenge, at $93,000 annually, is priced considerably higher than many of the competing treatments for advanced prostate cancer, which has made physicians reluctant to prescribe the therapy for fear of not being reimbursed. In response, Dendreon cut jobs and reduced expenses in order to make its cash stretch further.

Is this short interest deserved?

  • Skepticism had, until recently, been well-deserved. However, Dendreon shareholders received exciting news just two weeks ago that the Committee for Medicinal Products for Human Use -- Europe's equivalent to our FDA panel -- recommended the approval of Provenge in Europe. Although the European Medicines Agency isn't required to follow the opinion of its panel, it often does. An approval in the EU, combined with its domestic cost-cutting efforts, could go a long way in getting Dendreon closer to profitability and could once again reignite the takeover chatter than once surrounded the company. I would advise short-sellers to start looking elsewhere.

Which of the Nasdaq's most hated companies do you think has the best chance to burn short-sellers? Share your thoughts in the comments section below.

With the American markets reaching new highs, investors and pundits alike are skeptical about future growth -- you only need to look at these five companies as testament to this fact. But never fear: Many global regions are still stuck in neutral, and their resurgence could result in windfall profits for select companies. A recent Motley Fool report, "3 Strong Buys for a Global Economic Recovery," outlines three companies that could take off when the global economy gains steam. Click here to read the full report!


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  • Report this Comment On July 08, 2013, at 7:27 PM, Medicalrecordman wrote:

    UNXL - class-action lawsuit dismissed AH's today. My oh my, that was record time. Obviously the judge saw right through the short-seller B.S.

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