The Nasdaq's 5 Most Hated Stocks

It wasn't that long ago that the technology-heavy Nasdaq Composite (NASDAQINDEX: ^IXIC  ) was hitting a 13-year high. Sure, the government shutdown took a bit of wind out of the Nasdaq's sails, but overall it's been an incredible ride for an index that is now up 201% from its March 2009 closing low.

It's not hard to understand why so many high-growth stocks are feeling the love as interest rates sit near record lows, which is allowing for debt refinancing and borrowing at very attractive levels. In other words, few tech companies have to worry much about lending rates and are instead focused on expanding as fast as they can.

As we do each month, let's take a look at the Nasdaq's five most hated companies -- in essence, the five most short-sold stocks. Why? So we can see what characteristics they might share in order to avoid buying into similar companies that have drawn the ire of short-sellers.

Here are the five most hated Nasdaq components as of Oct. 1:

Company

Short Interest as a % of Outstanding Shares

Ebix (NASDAQ: EBIX  )

42.46%

SodaStream International (NASDAQ: SODA  )

41.08%

Uni-Pixel (NASDAQ: UNXL  )

40.94%

Sarepta Therapeutics (NASDAQ: SRPT  )

37.69%

Outerwall

35.48%

Source: S&P Capital IQ.

Ebix
Why are investors shorting Ebix?

  • Ebix shares hurdled three companies to jump to the dubious top spot this month as the Nasdaq's most short-sold stock. The reasons to bet against Ebix have pretty much been the same since late June: short-sale attacks, an investigation by the state of Georgia into possible "intentional misconduct, and a Goldman Sachs subsidiary seeing this investigation as cause to back out of its $20 per-share buyout offer for Ebix. With the company's financials in question, short-sellers are betting on further downside.

Is this short interest deserved?

  • There's a good a chance that Ebix is telling the truth and that it hasn't committed any wrongdoing, and in that case it would look dirt cheap at just six times forward earnings. However, Chinese stocks don't naturally become that cheap unless investors feel suspicious about something. Until the investigation clears Ebix of any wrongdoing or proceeds with charges, it's unlikely that Ebix will escape the clutches of short-sellers. I know I'll be keeping my distance.

SodaStream International
Why are investors shorting SodaStream?

  • Carbonated-beverage system maker SodaStream has attracted a bounty of short-sellers for two reasons. First, SodaStream has always traded at an aggressive P/E since it debuted. Although its current trailing P/E of 27 may not seem like much, that's significantly higher than the market average. Short-sellers watched this stock get halved in 2011 after the company lowered its earnings forecast and they're hoping for that to happen again. Secondly, the introduction of the Fizzio device by Starbucks is viewed as a potential competitor to SodaStream. Starbucks is known for infiltrating high-growth spaces and keeping its enemies close, so there's fear among shareholders that SodaStream's growth and even market share could dwindle.

Is this short interest deserved?

  • However, to continue that last thought, as Foolish tech and consumer goods guru Rick Munarriz notes, the Fizzio is geared toward corporate clientele, not the individual consumer like SodaStream. In other words, these two companies can coexist without stepping on each other's toes. As for growth, SodaStream is projected to boost sales by 30% this year and 19% next year with a now-minuscule forward P/E of 19. Even if it doesn't get taken over by a larger carbonated beverage maker like PepsiCo, SodaStream's disruptive future in the carbonated beverage market looks bright.

Uni-Pixel
Why are investors shorting Uni-Pixel?

  • Uni-Pixel, a developer of flexible electronic film, has also seen a big surge in short-sellers over the past month. The major reason for this appears to be ongoing skepticism that Uni-Pixel can ramp up production from essentially zero to 100% in a matter of months. Let's remember that Uni-Pixel delivered just $84,000 in revenue in the entirety of last year! Also, there have been multiple insider sales since the beginning of September, which could be nothing more than tax selling but could also signal that even insiders believe Uni-Pixel could be overvalued. 

Is this short interest deserved?

  • Based on forward-looking earnings-per-share estimates Uni-Pixel is cheap at less than six times 2014 earnings. However, a lot would have to go right for the company to meet these estimates. Even though it bagged a solid partner in Eastman Kodak, it'll need rumored competitor Apple to keep its distance, and it'll need to stay on track with its production ramp-up. I simply don't see how Uni-Pixel goes from stop to full-throttle without at least some hiccups. I would approach this stock like I was walking on eggshells.

Sarepta Therapeutics
Why are investors shorting Sarepta Therapeutics?

  • Short-sellers have had a vendetta against Sarepta and its lead Duchenne muscular dystrophy drug eteplirsen for months. The reasoning behind the pessimism relates to Sarepta's positive results coming from such a small patient pool (12 people) and the Food and Drug Administration's unwillingness to expedite the review of eteplirsen as a new drug applicant. That pessimism was compounded this month when GlaxoSmithKline and Prosensa's drisapersen failed to meet its primary and secondary end points in a DMD late-stage trial. Short-sellers now believe that despite the lack of competition, the FDA may take a much closer look at Sarepta's drug, which could lead to a necessary late-stage trial.

Is this short interest deserved?

  • I'd say yes and no. Obviously there's a lot of downside risk potential here that Sarepta could be forced to run another trial. There's always the possibility that something similar to what happened to drisapersen could happen to eteplirsen. Then again, with absolutely no competition on the horizon, if Sarepta gains approval for its lead drug it could easily rocket higher since you can expect a hefty price tag on this drug, as well as for other Sarepta pipeline products that work by a similar pathway.

Outerwall
Why are investors shorting Outerwall?

  • Finally, Outerwall (formerly Coinstar) returns to the list, having shed its original name but not the pessimism that drapes its every fiber. The knock against Outerwall by short-sellers is that it's a slowly dying company with a heavy reliance on DVD sales and little reliance thus far on streaming content. Outerwall's RedBox DVD rental kiosks are everywhere, but it's needed to introduce more and more simply to keep revenue on par. To put it another way, comparable revenue is falling and, as Netflix has clearly shown, people are turning toward streaming content for their viewing needs.

Is this short interest deserved?

  • Absolutely! If you didn't catch the stinker of an updated forecast that Outerwall released in mid-September, allow me to rehash it for you. It lowered its full-year revenue forecast to a range of $2.274 billion-$2.339 billion from a prior forecast of $2.372 billion-$2.475 billion (precise, aren't they?), and slashed adjusted EPS to a new range of $4.72-$5.12 from a prior guidance of $5.76-$6.26. Yikes! Outerwall's business is slowly dying whether you want to believe it or not. I feel short-sellers have this one dead to rights.

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Read/Post Comments (4) | Recommend This Article (3)

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 October 03, 2013, at 6:04 PM, tuan2le wrote:

    Wow! Still more than 37% short of SRPT? With this much fuel left in the tank how high will SRPT reach in this current upswing? $60?

  • Report this Comment On October 04, 2013, at 7:57 AM, EllenBrandtPhD wrote:

    55-56 initially. Then let's see if the other Bullish analysts raise towards Deutsche Bank's looking-pretty-brilliant 71 target,

    Sean, after the events of the past 10 trading days, I think that Short position may be as much as halved when the next stats come out. Still hefty, but no longer in the "most hated" group.

    And what could be the next interesting catalyst for the stock - due any day now - is information on which funds have significantly upped their positions. There are some very smart, good-at-biotech people who count this among their top picks, including George Soros. Let's look at what they have done recently.

    In addition, Chris Garabedian has promised exciting news on two new products beyond MD - and possibly beyond expected introductions for tuberculosis and nasty viruses with defense implications like Marburg and Ebola.

    A paper out this week seemed to imply one unexpected target area may be heart disease.

    What started the rally, besides Prosensa's failures, was four top Insiders, three of them research, not financial, people, buying large new blocks of shares on the open market, not via options.

    This kind of action, at a time when Insiders elsewhere in the market are selling like crazy, not buying quarter million dollar blocks, is the hidden reason the stock has done so well.

  • Report this Comment On October 11, 2013, at 6:47 PM, SteveMD123 wrote:

    The high short value for SODA and UNXL to me means that when some good news comes out and prices pop instead of drop, the short squeeze will be very profitable for owners of either. Unxl only needs their first sale, just 1 large customer firm will cause this stock to double in little time. The CEO of UNXL has been promising the product will sell in the 4th quarter, if that happens the short naysayers will be at least temporarily taken aback. Then, of course, comes the challenge of growing business and making a profit. Many of the short sellers don't think Reed Killion will amke this a real business. As an owner, I sure hope the shorts are wrong and start having to buy back soon.

  • Report this Comment On October 12, 2013, at 2:09 AM, keesluijt wrote:

    Ebix a Chinese stock?!?

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