Shorts Are Piling Into These Stocks. Should You Be Worried?

Do short-sellers have these stocks pegged? You be the judge!

Jan 27, 2014 at 12:08PM

The best thing about the stock market is that you can make money in either direction. Historically, stock indexes tend to trend upward over the long term. But when you look at individual stocks, you'll find plenty that lose money over the long haul. According to hedge fund institution Blackstar Funds, between 1983 and 2006, even with dividends included, 64% of stocks underperformed the Russell 3000, a broad-scope-market index.

A large influx of short-sellers shouldn't be a condemning factor for any company, but it could be a red flag indicating that something is off. Let's look at three companies that have seen a rapid increase in the number of shares sold short and see whether traders are blowing smoke or their worry has some merit.


Short Increase Dec. 13 to Dec. 31

Short Shares as a % of Float

Veeva Systems (NYSE:VEEV)



Campbell Soup (NYSE:CPB)






Source: The Wall Street Journal.

A cloud-based tug-of-war
What do you get when you pit a cloud-based health-care solutions provider against a sea of rabid value-investors? The answer is a 126% increase in your short interest over the last couple of weeks of December!

In the first week of December, Veeva -- whose cloud solutions include Veeva CRM and Veeva Vault, for the management of content-focused processes like clinical trials and manufacturing for life science companies -- reported another quarter of impressive growth. Veeva saw total third-quarter revenue climb 54% to $55 million as subscription-based revenue increased 95% to $38.9 million. Subscription revenue is incredibly important, because cloud-based companies rely on recurring revenue to drive cash flow and assist them when forecasting annual capital expenditures. Quarterly profit, however, was a mere $0.06 per share. 

On the flip side, value investors will stick on that final point (Veeva's profit) and note that, with Veeva spending heavily on research and development and pushing aside nonrecurring business in favor of subscription-based business, its near-term profit results will suffer. Given the stock's forward P/E of 128 and price-to-sales ratio of 21, it would certainly seem value investors are right to question Veeva's current valuation.

So where does the balance lie? My guess would be somewhere in the middle.

In the plus column, Veeva is growing its recurring business at a remarkable rate, which will help ensure stable cash flow in the latter half of this decade. In addition, there's a growing need from life sciences and biopharmaceutical providers to improve operating efficiency and reduce costs through the use of CRM and cloud-based software solutions.

In the negatives column, it'll be years before Veeva's profits grow in any meaningful way while the company is focused on expansion and subscription revenue growth. We may not see this forward P/E dip below 50 for another three or four years. To me, this means the real value of Veeva is probably a bit lower than where it's trading now, but that it also deserves a sizable premium to traditional health care software developers. Over the short term, this means short-sellers may indeed have a slight edge.

Uh-oh, spaghetti-O!
While Veeva is overflowing with potential avenues of growth, Campbell Soup is finding the going tough since reporting dismal first-quarter results for fiscal 2014 in November.

Although Campbell hasn't had much in the way of bad news that would spur short-sellers to jump aboard over the past month, the negative tone from its quarterly report could easily be the reason short interest rose by 22% in the latter half of December. For the quarter, Campbell reported a 2% decrease in revenue, a 4% drop in organic sales, and a 21% decline in earnings per share, to $0.66, missing Wall Street's consensus by a mile. To add insult to injury, Campbell also lowered its full-year forecast to account for the slow start and an inventory shift for many of its retailers.

If there was a bright spot over the past couple of months, it was the Bloomberg report that Warren Buffett and Berkshire Hathaway (NYSE:BRK-B) may be eyeing Campbell after purchasing Heinz. Berkshire Hathaway and its CEO make a living by purchasing seemingly "boring" companies that are capable of generating strong cash flow in any economic environment. Food companies like Campbell are still vulnerable to rising food costs, but they sell a basic necessity product that often does well no matter what.

Like Veeva, there are clear positives and negatives. Ultimately, though, this comes down to catalysts, and I'm just failing to see any for Campbell over the near term. While that's bad news for sending Campbell's share price much higher, it's also bad news for short-sellers who are looking for news that might push shares lower. With a beta of just 0.45, short-sellers would probably be best served looking elsewhere.

MEDNAX's beanstalk
Last, but far from least, we have MEDNAX, a U.S.-based medical group that focuses on neonatal, maternal-fetal, and pediatric physician services.

It's not hard to understand why short-sellers have been skeptical of rallies in hospital and insurer stocks lately given how poor Obamacare health exchange enrollments were through their first two months. Weaker than expected enrollment coupled with millions of Americans losing their health insurance because their policies didn't meet tougher benefits requirements established under the Patient Protection and Affordable Care Act is the perfect recipe to move short-sellers into these stocks.

But MEDNAX isn't your typical medical group. With a unique focus on neonatal and pediatric care it's able to use its niche physician network and pricing power to drive growth throughout the country. In MEDNAX's third quarter, it reported a 17% increase in revenue, net income, and cash flow from operations. Furthermore, a growing number of Medicaid and CHIP-eligible patients are having a positive reimbursement effect on MEDNAX's bottom line, to the tune of $0.06 per share in the third quarter.

With Obamacare enrollments only recently kicking into high gear and Medicaid-eligible patients flocking to this new health-care reform law, it looks as if MEDNAX could have a couple of years of double-digit growth hidden up its sleeve. It's not a company I'd recommend short-sellers bet against at the moment.

The No. 1 Way to Lose Your Wealth Without Even Knowing It
You’ve fought hard to build wealth for you and your family. Yet one all-too-common pitfall could completely derail your dreams before you even know it. That's why a company The Economist hails as "an ethical oasis" has isolated five simple questions you must answer to ensure that your financial future is really secure.

Can you answer YES to all five of these eye-opening questions?
Click here to find out -- before it’s too late!

Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

The Motley Fool owns shares of, and recommends Berkshire Hathaway. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information