The Nasdaq's 5 Most Hated Stocks

I actually had to do some digging to come up with the date of April 7, 2000 as the last time the technology-heavy Nasdaq Composite closed at a higher point than it did earlier this week.

The broader market has been the beneficiary of a strong rally as the unemployment rate has dropped precipitously from 10% down to 6.6%, housing prices have jumped by double-digits in many of America's largest cities, and GDP growth has been accelerating, clocking in at 4.1% for the third quarter.

This return to growth has allowed investors to take a riskier approach to investing, which means seeking out higher-growth stocks and leaving some stodgier defensive companies on the shelf. The end result, as we've seen, has been a monstrous rally in the Nasdaq Composite from its recession lows.

Despite this rally, though, not everyone is on board. While I don't refer to myself as a bear, I do consider myself a skeptic. And as a skeptic, I noted three possible reasons in January why the overall market could well be ahead of itself. Although you can read this analysis in more detail, the basic gist of my argument was that a falling labor participation rate was masking a lack of genuine job growth; that the extension of QE3 is spoiling the U.S. consumer with artificially low lending rates and it's going to make the transition to normal lending rates very choppy; and that corporate share buybacks and cost cuts are masking a lack of organic growth.

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  )

52.11%

SodaStream International (NASDAQ: SODA  )

39.91%

Uni-Pixel (NASDAQ: UNXL  )

38.67%

Ebix (NASDAQ: EBIX  )

36.09%

Sarepta Therapeutics (NASDAQ: SRPT  )

35.61%

Source: S&P Capital IQ.

Myriad Genetics
Why are investors shorting Myriad Genetics?

  • Myriad Genetics is "a riddle, wrapped in a mystery, inside an enigma," to borrow a phrase from Winston Churchill. Myriad's news is either overwhelmingly positive or painfully bad, and short-sellers tend to play the range-bound share-price game when betting against Myriad. Perhaps no story has drawn the ire of short-sellers more than the Centers for Medicare and Medicaid Services proposal to cut its BRACAnalysis reimbursement rate from $2,700 to $1,438. If that weren't enough, the U.S. Supreme Court invalidated some of Myriad's BRCA 1 and BRCA 2 gene patents in mid-2013, barring companies from patenting naturally occurring human genes and allowing competing BRCA 1/2 gene tests to enter the market just days later.

Is this short interest deserved?

  • Obviously some caution is warranted given the huge proposed reimbursement reduction from the CMS. Myriad generated 69% of its total revenue from its BRACAnalysis test last quarter, so a reduction here, even if Medicare only makes up a smaller portion of its revenue, is going to sting. On the other hand, Myriad made a smart strategic move in acquiring privately held Crescendo Bioscience for $270 million, which will help it expand its product offerings, and it also recently crushed Wall Street's quarterly and full-year revenue guidance estimates. Personally, I like the long-term outlook for personalized diagnostic companies moving forward, especially with baby boomers hitting their retirement age. What really sways me toward believing that Myriad could crush its short-sellers has been the exciting accuracy of its prostate cancer aggressiveness diagnostic tool, Prolaris, which I project could bloom into a top revenue-producer for the company.

SodaStream International
Why are investors shorting SodaStream International?

  • Home beverage carbonated system developer SodaStream has drawn the ire of short-sellers since practically day one! Short-sellers have dived into SodaStream on the expectation that growth will slow, or that one of its significantly larger soft drink peers, such as Coca-Cola or PepsiCo., would simply squash it by introducing an at-home carbonated system of its own. SodaStream's poor fourth-quarter results were exactly what short-sellers had been waiting for.

Is this short interest deserved?

  • For the past few months I've been quite optimistic about SodaStream -- and trust me, I still am -- but I'm a little less optimistic this month after Coca-Cola and Green Mountain Coffee Roasters struck a long-term deal to bring Coke products into people's homes via the Keurig Cold machine. In my opinion, I view this as a small, but viable threat to SodaStream's long-term growth. That aside, SodaStream is still capable of growing its top-line by double-digits, is done with the fourth-quarter which typically features the sale of lower-margin machines rather than high-margin CO2 refills, and is valued at what I believe to be a reasonable 17 times forward earnings. Short-sellers may want to consider looking elsewhere for ideas.

Uni-Pixel
Why are investors shorting Uni-Pixel?

  • The bet against Uni-Pixel has long been a bet that a company which makes touch-screen technology couldn't simply go from zero production to full-scale production in the blink of an eye. Despite some key partnerships, which include Eastman Kodak, Uni-Pixel has no history of profitability and was deemed unlikely to step right into profitability by pessimists.

Is this short interest warranted?

  • If you saw Uni-Pixel's first-quarter report, the answer to this question is a big "Heck yes!" For the quarter Uni-Pixel reported a paltry $11,409 in revenue, and its loss ballooned to $0.50 per share from $0.30 per share in the year-ago period. According to Yahoo! Finance, this loss was $0.15 per share wider than expected, and full-year EPS projections from Wall Street have dipped from a profit of $1.34 three months ago to a loss of $1.27 now! To make matters even worse, Uni-Pixel also had both its CEO and COO unexpectedly resign within 24 hours of each other, further complicating an already slow scale-up of its production. In sum, short-sellers will be in control of Uni-Pixel until its top and bottom-line give them a reason to flee.

Ebix
Why are investors shorting Ebix?

  • Speaking of companies shrouded in uncertainty, we have insurance industry software developer Ebix. On paper, Ebix is dirt cheap, valued at a mere 12 times forward earnings. But there are a number of dark clouds hanging over Ebix which have allowed short-sellers to pounce. The primary matter is an ongoing investigation into alleged "intentional misconduct" at the company by the state of Georgia which Ebix has thus far denied. Adding fuel to the fire, despite denying any wrongdoing, Ebix agreed on Feb. 6 to pay out $6.5 million in a class action suit to shareholders to avoid any additional litigation stemming from litigation filed in 2011.

Is this short interested warranted?

  • Until Ebix can clear itself of a number of possible litigations, it's going to be very difficult to shake short-sellers and trust this company. Even if Ebix is proven to be in the clear and no evidence of wrongdoing is discovered, its growth rate of 2%-3% leaves a lot to be desired, even with a relatively modest P/E ratio. My suggestion would be to keep your distance and wait for this latest state of Georgia investigation to be resolved before even attempting to buy Ebix.

Sarepta Therapeutics
Why are investors shorting Sarepta?

  • Last but certainly not least we have clinical-stage biopharma Sarepta Therapeutics which is hard at work developing exon-skipping therapies to treat different versions of Duchenne muscular dystrophy. Pessimists have piled into Sarepta after a competing therapy from GlaxoSmithKline and Prosensa, known as drisapersen, failed badly in a phase 3 study as a treatment for DMD, with short-sellers hoping for a similar fate. Short-sellers already partially got their wish when the Food and Drug Administration rejected Sarepta's request for an accelerated approval in November, as it would not make the distinction that increased dystrophin production equaled a clinically significant benefit. This result meant Sarepta would have to run a costly pivotal phase 3 trial for eteplirsen, causing Sarepta's share price to plummet.


Source: Sarepta Therapeutics.

Is this short interest warranted?

  • This is the toughest one of all to call because a huge move is practically guaranteed in its share price. If the outcome is positive in its phase 3 trial, Sarepta's share could soar as it'll be the lone supplier of a therapy to treat 13% of the DMD market, and it would go a long way to validating the success of its remaining exon-skipping pipeline therapies. In contrast, a failure would be devastating, as its pipeline is entirely based on exon-skipping technology. I'd say caution is certainly warranted, but short-sellers should also realize they could just as easily get steamrolled if they're not careful.

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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 March 07, 2014, at 8:41 PM, crystrr wrote:

    With future emphasis on preventative care to reduce US medical costs companies like Myriad should have significant growth potential, especially since they have the good basic science to provide new products.

  • Report this Comment On March 08, 2014, at 2:44 PM, MightyCalD wrote:

    I find myself curious as to what your criteria for "Most Hated" are. I just checked the numbers and the 5 most *shorted* stocks on NASDAQ (by percentage of float) currently look to be: VRA, MYGN, EBIX, SODA and CALL.

    Of those 5, only 3 seem to have made your list, along with UNXL and SRPT, which currently occupy the 10th and 11th positions on the NASDAQ short % list (as of the most recent Feb 14 numbers). So why give VRA and CALL a pass and then skip over JAKK, TTS, ANGI, and GPRE to pick on UNXL and SRPT?

  • Report this Comment On March 08, 2014, at 6:35 PM, MightyCalD wrote:

    OK, so never mind my previous comment, I see now that you're using short interest as a percentage of total shares outstanding, rather than the more common metric of short interest as a percentage of real float. I may still be a little mystified as to why, but at least that's one mystery solved.

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