The Nasdaq's 5 Most Hated Stocks

It's beginning to look like you could throw a dart this year in the tech sector and hit a winner. The heavily tech-based Nasdaq Composite (^IXIC -0.64%) is up 30% year to date, which is three times higher than the average historical move of the markets over the past decade.

There certainly are reasons to believe that this rally could continue given that the housing market continues to rebound, unemployment rates are at a six-year low, and pricier manufacturing-based items like aircraft orders and auto sales are growing at a remarkable pace.

Investors don't necessarily agree that this utopian rally can go on forever. Warning signs abound that the tech-heavy Nasdaq could be getting a bit frothy, including the fact that most companies are using cost-cutting and share repurchases to boost their bottom line rather than relying on organic growth to drive results.

That said, there are a growing number of pessimists concentrating in a handful of Nasdaq-listed companies that I would refer to as the Nasdaq's most hated stocks. As we do every month, I'm suggesting we do a deeper dive into the five most hated Nasdaq stocks to see what characteristics, if any, they might share in order to avoid buying into similar companies that have drawn the ire of short-sellers.

Here are the Nasdaq's five most hated stocks:

Source: S&P Capital IQ.

Uni-Pixel
Why are investors shorting Uni-Pixel?

• Uni-Pixel has collected a lifetime's worth of short-sellers this year after emerging from out of nowhere to see its share price climb as much as 700% before losing most of those gains. The developer of flexible electronic film has signed up a solid partner in Eastman Kodak, and could see its technology boom in many next-generation mobile devices. However, the company hasn't yet proven that it can ramp up production, and that's what short-sellers seem to be honing in on. With only $84,000 in revenue all of last year, pessimists are betting on lofty expectations simply not being met.

Is this short interest deserved?

• Given that Uni-Pixel has no proven track record to base its past performance on, I'd say its capacity to rev up production from nonexistent to full bore is certainly worth some skepticism. One factor short-sellers will want to consider here is that Uni-Pixel's relatively low float and high short interest could easily lead to a short squeeze and shoot shares much higher if it is able to meet the Street's lofty expectations. I'm not as convinced Uni-Pixel will be a success right out of the gate, especially with Apple suggested as a possible competitor in the flexible electronic film space. Until Uni-Pixel delivers profits, I'll remain skeptical. The company does report later this week, so keep your eyes peeled for what should be a volatile reaction to its progress.

SodaStream International
Why are investors shorting Sodastream International?

• The bets against revolutionary at-home carbonated beverage maker SodaStream continue to grow on a month-to-month basis, but I can't, for the life of me, figure out why! I understand the basic premise of the short-sellers' point of view here, which is that at 24 times trailing earnings SodaStream could easily be squashed by a much larger rival with deeper pockets like PepsiCo or Coca-Cola. However, earnings misses have been few and far between for SodaStream. I will mention, though, that in the one instance where SodaStream did guide earnings lower the share price lost about half its value in just a few months.

Is this short  interest deserved?

• I have to wholeheartedly agree with Motley Fool analyst Blake Bos with regard to SodaStream that the market is completely clueless! For the quarter, SodaStream's sales improved 29% to $144.6 million as adjusted earnings improved slightly to $0.90. SodaStream delivered a really nice increase of 34% in the number of soda starter kits that it sold, which paves the way for the sale of its high-margin CO2 refills that deliver most of the company's money. This is a revolutionary company that is more a candidate to be taken over than snuffed out by a competitor. Over the long run this could be a thorn in most pessimists' sides.

Ebix
Why are investors shorting Ebix?

• With an earnings report due at the end of this week, short-sellers are counting on an investigation by the state of Georgia into "intentional misconduct," as well as repeated short-sale attacks from a number of websites, to have driven business away from Ebix and to its competitors during the quarter. Add the fact that a Goldman Sachs subsidiary backed out of purchasing the company because of its legal clouds and you have the perfect short-sale recipe.

Is this short interest deserved?

• As long as there's a possible legal cloud following Ebix chances are that short-sellers are going to be clinging on with all their might. Ebix's quarterly report later this week could go a long way toward freeing it from any negative speculation, but the company has admittedly been trading at a fairly low valuation relative to its peers for some time. Unless there's a legal update built into its upcoming report it may not matter all that much.

Dendreon
Why are investors shorting Dendreon?

• Talk about a company that's been an absolute disaster in 2013! Dendreon has drawn the ire of short-sellers primarily because of the ineffectiveness in launching and selling its lead metastatic prostate cancer drug Provenge. Dendreon this year did manage to get Provenge approved in Europe, but only being beaten to the punch by many of its peers. Not to mention that increasing U.S. competition forced Dendreon to lower its sales guidance earlier this year, eliminating any chance of year-over-year growth for Provenge.

Is this short interest deserved?

• It's absolutely deserved given the dire straits that the company finds itself in, but that doesn't make it nonetheless a volatile and scary short position. Last week there were rumblings from Bloomberg that Dendreon was putting itself on the auction block, which briefly sent shares up more than 30% in a matter of days. This doesn't in any way mean that Dendreon is a lock to be sold because the real asset here is the company's technology platform and pipeline, not Provenge which has been relegated to a lower tier next to Johnson & Johnson's Zytiga and Medivation's Xtandi. Until Dendreon can deliver organic Provenge growth and stem its cash burn there isn't much cause to be positive on the stock, but pessimists will want to keep a close eye on this buyout chatter.

Outerwall
Why are investors shorting Outerwall?

• You may know Outerwall best by its previous name, Coinstar, and by its iconic Redbox movie and video game DVD rental stations, but it's no stranger to short-sellers who have absolutely hounded the company for years. The case against Outerwall is that the majority of its business is dominated by its Redbox DVD rental kiosks, and that DVD sales are on the decline with the convenience of streaming video taking over the market. Speculation on the Street is that if Outerwall doesn't move toward some form of digitized platform quickly it could struggle to produce positive free cash flow within a matter of years.

Is this short interest deserved?

• I believe this short interest is absolutely deserved, but sometimes even the pessimists get a smacking they didn't see coming. Outerwall just two weeks ago reported third-quarter results that came in much better than expected, with RedBox revenue up 7% and net income rocketing higher by 125% to $82.7 million. The company also excited investors by announcing that it would return somewhere between 7% and all of its free cash flow to shareholders, initially as a buyback. While this could help improve its earnings per share, it only masks the fact there is no core organic growth from DVD rental sales. I suspect that at some point that Outerwall will be unable to introduce new Redbox kiosks due to market saturation and streaming services will begin to really dig into its bottom line.