The Nasdaq's 5 Most Hated Stocks

The Nasdaq Composite has rallied more prolifically than any other U.S index since the recession, yet short-sellers are nonetheless digging into these five companies.

Feb 5, 2014 at 5:16PM

The technology-heavy Nasdaq Composite (NASDAQINDEX:^IXIC) may have hit a bit of a rough patch over the past couple of weeks, but since the U.S. markets bottomed in March 2009, no major index has delivered a stronger return.

Like the S&P 500, which we've taken a closer look at over the past two days, the Nasdaq Composite has benefited from a general rebound in the U.S. economy. Third-quarter GDP, for example, grew at a robust 4.1%, while the preliminary reading for the fourth quarter showed a still-healthy 3.2% gain. Behind this strong growth has been a steady decline in the unemployment rate, which is currently down to a five-year low of 6.7%, as well as a continuation of historically low lending rates, which have spurred business expansion and the housing sector. Given that the Nasdaq is comprised of many faster-growth but higher-risk companies, it's been able to handily outperform its peer indexes.

Nasdaq

Despite the rebound in the U.S. economy, though, a number of skeptics remain. You don't have to look far these days to see the tell-tale signs of worry. Lending rates, for instance, have risen almost 100 basis points from their May low, which caused loan originations to hit a nearly two-decade low in December despite lending rates still traipsing along near record lows. Similarly, stock EPS growth may be up, but top-line growth has been anemic, with companies cutting costs, hoarding cash, and buying back their own stock in order to make up for erratic consumer-spending habits.

With that in mind, I'm suggesting we do what we do every month: take 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:

Company

Short Interest as a % of Outstanding Shares

Myriad Genetics (NASDAQ:MYGN)

50.63%

SodaStream International (NASDAQ:SODA)

41.87%

Uni-Pixel (NASDAQ:UNXL)

41.73%

Questcor Pharmaceuticals (NASDAQ:QCOR)

38.14%

Ebix

36.75%

Source: S&P Capital IQ.

Myriad Genetics
Why are investors shorting Myriad Genetics?

  • Gaining the dubious honor of most short-sold Nasdaq component this month is molecular diagnostics test company Myriad, which now has nearly 51% of its outstanding shares held by pessimists. The company has been hit with a double-whammy since June which short-sellers have latched onto. First, the company had some of the key gene patents that protected its BRACAnalysis test from competition invalidated, allowing competitors to enter the BRCA1 & BRCA2 gene test market within days of the verdict. And secondly, in late December the Centers for Medicare and Medicaid Service proposed a reimbursement drop of close to 50% for its BRACAnalysis test. With increasing competition and weaker Medicare reimbursements, pessimists are counting on increasing downside for Myriad Genetics.

Is this short interest deserved?

  • Not to purposely confuse anyone, but yes and no. On one hand, it's pretty evident that Myriad's market share and pricing power are in serious trouble when it comes to its BRACAnalysis test. It wouldn't be a problem if Myriad's product revenue were better diversified, but its BRACAnalysis test was responsible for 69% of its revenue as of its second-quarter results last night. On the other hand, Myriad absolutely crushed Wall Street's projections with 37% revenue growth and a 57% increase in profits as it boosted its full-year guidance and announced the acquisition of privately held Crescendo Bioscience for $270 million. On paper, Myriad makes a lot of sense, given that personalized diagnostic testing will play a crucial role in cancer patient treatment over the coming decades. Over the near term, though, until we see how these reimbursement cuts and tougher competition affect its bottom line, I'd suggest still sticking to the sidelines.

SodaStream International
Why are investors shorting SodaStream International?

  • Another regular fixture among the Nasdaq's most short-sold companies is at-home soda-machine maker SodaStream International. Pessimism has been building in SodaStream for months with the expectation that growth would slow. Needless to say, investors got their wish, with SodaStream starting off the year by warning that a combination of weak demand, negative currency translation, and poor product mix would cause the company to fall short of its prior projections. Although full-year revenue was just 1% lower than expected, SodaStream's full-year net income was slashed to $52.5 million from $65 million.
Sodastream Machine

Is this short interest deserved?

  • If we're talking about hindsight, then absolutely. Moving forward, though, I don't think there's much downside left in SodaStream's share price given its 17% revenue growth expectations and the fact that it's valued at just 16 times forward earnings -- that's a PEG ratio of less than one for you math-o-phobes! SodaStream can also bring something completely revolutionary to the table with its at-home carbonation kits. Wall Street loves uniqueness, and there aren't many companies that are anywhere near duplicating SodaStream's success in personalizing the carbonated beverage market. Finally, SodaStream has the perfect recurring-revenue model whereby it sells a lower-margin soda machine upfront but benefits from higher-margin syrup sales down the road. It's a company I've added to my watchlist as a possible buy candidate and not a company I'd suggest short-sellers waste any further time with.

Uni-Pixel
Why are investors shorting Uni-Pixel?

  • For months I've been saying that short-sellers have been positioning themselves in flexible touch-screen cover manufacturer Uni-Pixel with the expectation of production ramp-up delays. In January these pessimists finally got their wish, with the company noting a delay in InTouch sensor production. In fact, the company didn't ship a single commercial production order last year as it originally projected it would in the fourth-quarter. To add icing to the cake, Uni-Pixel's CEO and COO both recently announced they'd be stepping down, making it even less uncertain when commercial production will actually begin. 

Is this short interest deserved?

  • Until Uni-Pixel proves otherwise, absolutely. The company made a name for itself by snagging brand-name partners such as Eastman Kodak, but it's facing an SEC subpoena over the nature of its InTouch contracts, is having worlds of problems trying to go from zero production capacity to full bore, and frankly hasn't delivered on any of its promises -- and must now do so without its CEO and COO. That's about as bad a scenario as I can conjure up, and it should be more than enough to keep short-sellers latched on very tightly to Uni-Pixel.

Questcor Pharmaceuticals
Why are investors shorting Questcor Pharmaceuticals?

  • The big reason pessimists have piled into Questcor Pharmaceuticals are a number of open investigations into the company's marketing practices from multiple jurisdictions around the country. The company's only FDA-approved drug, Acthar, costs $23,000 per vial regardless of indication, and is currently approved to treat nearly 20 types of ailments. Investigators are attempting to determine if this price point is reasonable based on treatments claims made by Questcor. Based on the high number of short-sellers, the expectation is that Questcor could face a sizable fine.

Is this short interest deserved?

  • This is a bit of a tough call, because occasionally these investigations turn up absolutely nothing, while in other instances they can result in exorbitant fines. Sales of Acthar have certainly not been an issue, with net sales up 65% in the third quarter from the prior-year period as vial shipments rose 45%. As Questcor continues to gain new indications, its dividends and profits are likely to move higher as well. The real question here is whether or not its marketing practices are kosher. Until that question's answered, it might be wise to keep your distance from Questcor.

Ebix
Why are investors shorting Ebix?

  • Similar to Questcor above, on-demand insurance software provider Ebix has drawn the ire of short-sellers because of an ongoing investigation by the state of Georgia into alleged "intentional misconduct." This investigation cost Ebix shareholders a $20/share buyout and have shrouded the company in a gray cloud despite an incredibly inexpensive single-digit P/E ratio.

Is this short interest deserved?

  • Like Questcor, until we see some resolution to this ongoing investigation I'm not exactly sure how you can trust Ebix's figures. Even if Ebix's profits are legit, any wrongdoing could be punished by a monetary fine. Of course, Ebix could come out in the clear as well. I'm not much of a gambler when it comes to attorneys looking into potential misconduct, so I'd just rather stick to the sidelines until we have better clarity.

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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 SodaStream. 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.

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