The Nasdaq's 5 Most Hated Stocks

Economic problems and worries? We'll have none of those here, says the Nasdaq Composite (NASDAQINDEX: ^IXIC  ) , which soared to a fresh 12-year high on this week's news that the Federal Reserve is no closer to ending its free-money campaign, known as QE3, than it was last month. This likely means an ongoing period of low lending rates, which should spur borrowing by businesses and consumers, as well as purchasing of goods from small consumer products all the way up to homes via mortgages.

However, not everyone has bought into this rally -- and you can count me among the group. There are worrisome factors such as cost-cutting contributing to the earnings beats, while top-line growth continues to fall short. In addition, the imminent near-future ending of QE3 could end up hurting the economy by causing interest rates to rise, and it could cause growth in sectors such as banking and homebuilding to come to a grinding halt.

To that end, this is why we look each month at the Nasdaq Composite's five most hated (i.e., short-sold) stocks to get an idea of what investors are looking for in the purported "worst" companies among the tech-heavy index so that we might avoid making the same mistake by investing in companies with high levels of pessimism in the future.

Let's have a look at the Nasdaq's most hated companies:

Company

Short Interest as a % of Shares Outstanding

GT Advanced Technologies

(NASDAQ: GTAT  )

43.41%

Outerwall (NASDAQ: OUTR  )

40.98%

Uni-Pixel

38.29%

Sarepta Therapeutics

(NASDAQ: SRPT  )

36.44%

NII Holdings (NASDAQ: NIHD  )

35.82%

Source: S&P Capital IQ.

GT Advanced Technologies
Why are investors shorting GT Advanced Technologies?

  • GT Advanced Technologies, abbreviated GTAT, hasn't relinquished its top spot as the Nasdaq's most hated stock. However, its short interest dropped ever so slightly month over month. Short-sellers have positioned themselves in anticipation of weak second-quarter results, expected to be released next week. The thesis is that with Chinese solar firms so reliant on GTAT for parts, yet prices so depressed and Chinese solar firms carrying so much debt, GTAT may see pricing pressures (which would lead to lower margins) or simply fewer orders as its customers fold under crushing debt levels.

Is this short interest deserved?

  • Skepticism of anything solar coming out of China clearly has to be looked at with a discerning eye, but the Chinese government made clear last month that it plans to do everything in its power to quadruple solar-engineering capacity to 35 gigawatts by 2015. The Chinese government realizes that with new anti-dumping tariffs set to go in effect in Europe, and First Solar being staunchly competitive in the U.S., it needs to do everything it can to support its domestic solar industry, regardless of what it might mean for Chinese solar margins. That's good news for GTAT, which is being heavily relied upon by Chinese solar manufacturers. I'd actually advise short-sellers here to tread with the utmost care.

Source: derrickcollins, Flickr.

Outerwall
Why are investors shorting Outerwall?

  • Outerwall may have changed its name from Coinstar, but the company best known for its Redbox DVD rental kiosks and Coinstar change machines hasn't done a very good job of hiding from short-sellers. The thesis behind the negativity remains the same: DVDs are on their way out as streaming content becomes the new norm -- one need only look at Netflix for confirmation of this! Short-sellers are betting that an ongoing DVD exodus will pressure Outerwall's cash flow and push the company into a costly restructuring period in which it spends a lot of its free cash flow in an effort to diversify its revenue stream beyond its network of kiosks.

Is this short interest deserved?

  • Let me think about this...uh, yeah! Outerwall's short-sellers certainly had the last laugh following its second-quarter earnings report, which saw the company trounce EPS estimates by nearly 100% but fall short on revenue not only for this quarter, but also for the upcoming quarter and the full year. Outerwall also slightly reduced its EPS forecast for the full year. There's little denying the margin pressure it's under, and I don't see how it's going to get better anytime soon.

Uni-Pixel
Why are investors shorting Uni-Pixel?

  • Not a lot has changed since we last looked at Uni-Pixel, other than the fact that short-sellers have added even more shares since June. The reasoning behind the increasing pessimism can be traced to two factors. First, Uni-Pixel's product is still largely unproven. To think it can grow from $76,000 in revenue in all of 2012 to millions overnight without potential glitches and new competitors is foolish. Second, investors appear to have ended their love affair with Uni-Pixel's flexible electronic film. We investors love new technology, but we're terrible at predicting when it will take off.

Is this short interest deserved?

  • Given the steady stream of lawsuits and investigations being filed against the company since the beginning of July, as well as the fact that Uni-Pixel has yet to turn a profit, I'd certainly say short-sellers are justified in their pessimism. The real challenge comes in a week when Uni-Pixel reports its quarterly results. Given its volatile nature, short-sellers could easily be squeezed out of their positions, so it's definitely not for the faint of heart. However, the fundamentals as of now wouldn't support a huge rally, in my opinion.

Source: Steven Depolo, Flickr.

Sarepta Therapeutics
Why are investors shorting Sarepta?

  • Sarepta Therapeutics is a newcomer to the most-hated list this month as it awaits final word from the Food and Drug Administration on its lead experimental drug, eteplirsen, for the treatment of Duchenne muscular dystrophy. Pessimists of this company believe its minimalist data (i.e., a relatively small mid-stage trial) could raise enough doubts on the FDA's end to prevent eteplirsen from being approved. Earlier this month Sarepta shares dipped on news that the FDA wouldn't accept the connection between an increase in the production of dystrophin and eteplirsen's effectiveness, denying Sarepta an accelerated approval pathway for its drug. That connection pretty much needs to be established if Sarepta hopes to get its drug approved by the FDA!

Is this short interest deserved?

  • I'm not going to side with either the optimists or the pessimists here, opting instead to stay on the sidelines. The consequences of the FDA's decision will certainly be devastating for one team or the other. A standard-speed approval isn't too big of a setback for optimists, so I wouldn't get too caught up in that aspect of eteplirsen's road to filing its new drug application. The FDA panel's findings and the ultimate ruling by the FDA are all that really matter; everything in between is just white noise.

NII Holdings
Why are investors shorting NII Holdings?

  • Where to begin? NII Holdings, a wireless-service provider in Central and South America, has struggled mightily with high levels of debt, ballooning losses, lower per-user revenue, and tougher competition in highly saturated regions, just to name a few things. In addition, many regions in South America have installed 3G networks, which NII Holdings is only now rolling out -- and finding to be a costly venture.

Is this short interest deserved?

  • Of the five companies mentioned here, I'd say NII is the one that deserves the pessimism most of all, especially following yesterday's disastrous second-quarter earnings release. For the quarter, NII delivered an 11% decline in revenue to $1.26 billion as its losses ballooned to $2.30 per share from $0.60 per share in the year-ago quarter. Comparatively, Wall Street expected revenue of $1.38 billion and a much smaller per-share loss of $1.03. Worse yet, NII Holdings added another $1.6 billion in debt onto its books this year and now carries about $5.8 billion in debt. This situation could get much uglier before it gets better, and I would strongly suggest avoiding NII Holdings.

Which of these five companies has the best shot at proving short-sellers wrong? Share your thoughts in the comments section below.

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Related Tickers

9/19/2014 5:15 PM
^IXIC $4579.79 Down -13.64 -0.30%
NASDAQ Composite… CAPS Rating: No stars
GTAT $11.16 Down -0.45 -3.88%
GT Advanced Techno… CAPS Rating: ****
NIHD $0.07 Down -0.04 -33.33%
NII Holdings, Inc. CAPS Rating: **
OUTR $58.49 Down -1.85 -3.07%
Outerwall CAPS Rating: ***
SRPT $21.78 Down -0.75 -3.33%
Sarepta Therapeuti… CAPS Rating: ***

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