The Nasdaq's 3 Most Hated Stocks

The Nasdaq Composite has more than tripled since the recession, but pessimists have swarmed these three stocks with high hopes that their runs are done.

Apr 9, 2014 at 5:16PM

Since hitting highs not seen in practically 14 years, the technology- and biotechnology-heavy Nasdaq Composite has been throttled, falling more than 5% on a trailing basis from the high point reached in early March.

Nasdaq

Comparatively speaking, this latest correction is nothing more than a blip for an index that has soared more than 200% since the recession. The Nasdaq Composite has been a direct beneficiary of record-low lending rates that have allowed fast-growing tech and biotech companies to take on debt in order to expand and further research and development. This innovation surge has led to higher earnings and a return of robust merger and acquisition activity, pumping the index ever higher.

Of course, not everyone is of the same opinion that the Nasdaq, or U.S. markets in general, can head higher.

Skeptics, like myself, point to the winding down of the Federal Reserve's economic stimulus as a primary reason that the markets' run may be done. The Fed has been purchasing mortgage-backed securities and long-term Treasuries for more than a year in order to improve MBS liquidity and push bond prices up (and thus yields lower). With fewer long-term Treasuries being purchased -- and remember, long-term Treasuries help determine mortgage rates -- the chance that interest rates will rise is increasing. A number of other factors are also alarming, such as the precipitous decline in the labor force participation rate and the fact that many companies are masking weak growth prospects behind cost-cutting and share repurchases.

With this in mind, I'm suggesting we do what we do every month: take a deeper dive into the three 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 three most hated stocks:

Company

Short Interest as a % of Outstanding Shares

Myriad Genetics (NASDAQ:MYGN)

53.5%

Outerwall (NASDAQ:OUTR)

45.1%

Smith & Wesson (NASDAQ:SWHC)

39.6%

Source: S&P Capital IQ.

Dna Test

Source: Food and Drug Administration, Wikimedia Commons.

Myriad Genetics
Why are investors shorting Myriad Genetics?

  • Two factors have been fueling the fire for bets against Myriad Genetics since last summer. First, in June the U.S. Supreme Court struck down a handful of Myriad patents that allowed the company to protect its BRACAnalysis gene test from competition. With naturally occurring genes in the body deemed not patentable, a number of would-be competitors entered the market for BRCA 1 and BRCA 2 gene tests, either directly or indirectly, within days. Second, the Centers for Medicare and Medicaid Services in December announced new proposed Medicare reimbursements of just $1,438 for Myriad's BRACAnalysis test, down nearly 50% from the previous reimbursement of $2,795 for the gene test. With BRACAnalysis comprising nearly 70% of Myriad's revenue in its latest quarter, short-sellers are simply counting on tough competition and weaker reimbursements to crush shares.

Is this short interest warranted?

  • With the looming gray cloud of the CMS' decision, some level of skepticism has been deserved. However, now that we know the agency is only going to cut the Medicare reimbursement rate for BRACAnalysis by 22%, to $2,184, shareholders can breathe a bit easier. In addition to this favorable decision, Myriad's top and bottom lines are headed in the right direction with the company handily outpacing Wall Street's expectations in its latest quarter. Myriad is also bringing in a fresh line of rheumatoid arthritis diagnostics with the strategic purchase of privately held Crescendo Bioscience for $270 million, which should be accretive to earnings. All told, Myriad isn't the screaming buy it once was, but short-sellers could continue to get burned here if they aren't careful.

Outerwall
Why are investors shorting Outerwall?

  • You may not recognize the name initially, but Outerwall is the owner of Redbox DVD rental kiosks and Coinstar change kiosks. While its Coinstar machines have performed admirably, delivering 5.9% same-store sales growth in the fourth quarter, the company's Redbox division has had short-selling vultures swarming for some time now. The expectation from pessimists, despite the business remaining profitable up to now, is that streaming movies on your PC, laptop, mobile device, or via your cable or satellite provider will make DVD rental obsolete in coming years. The allure, of course, is that DVD rentals are an incredibly high-margin product if the business is booming, which is why Outerwall has been reluctant to back away.
Images

Is this short interest warranted?

  • In spite of its still impressive cash flow generation of $166 million in 2013, and plans to repurchase up to $350 million in common stock, I believe that betting against Outerwall over the long run is the right move. The primary growth driver here is Coinstar, and that's frankly a scary thought as it only accounted for 13.6% of total revenue in the fourth quarter. Actual Redbox revenue rose just 1.7%, while net revenue per rental was up only 0.4% from the year-ago period. What this tells me is that Redbox is adding new kiosks simply to boost its top line, but it really doesn't have any pricing power since the convenience factor could just as easily sway consumers to stream their movie online or on their home TV. Over the long run I suspect Outerwall has considerably more downside left than upside.
 

Smith & Wesson
Why are investors shorting Smith & Wesson?

  • Firearms manufacturer Smith & Wesson, as well as its peers, have (no pun intended) come under fire from short-sellers in recent years because of the ongoing threat by Congress and the president that tougher gun control laws will be enacted. Tragic scenes, such as those in Fort Hood, Texas, and Newtown, Conn., only serve to drive home the pessimists' point that tougher enforcement is needed which could threaten to drive down sales for gun manufacturers like Smith & Wesson.

Is this short interest warranted?

  • I would say that skepticism is partially deserved, as emotions are a big component as to whether tougher gun control laws are heard before Congress. The midterm election could have big implications on Smith & Wesson, so there's certainly some room for downside if things don't go its way in November. On the other side of the coin, that same fear is leading to impressive sales growth at Smith & Wesson, which recorded a 7% revenue increase in the third quarter amid a 30% rise in year-over-year handgun sales. With its margins rising and the company sporting a minuscule forward P/E of 10, I believe short-sellers can find a number of opportunities more lucrative than this gun maker. 

The Motley Fool's top stock for 2014 is one that even short-sellers would be wise to avoid
There's a huge difference between a good stock and a stock that can make you rich. The Motley Fool's chief investment officer has selected his No. 1 stock for 2014, and it's one of those stocks that could make you rich. You can find out which stock it is in the special free report "The Motley Fool's Top Stock for 2014." Just click here to access the report and find out the name of this under-the-radar company.

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 has no position in any companies mentioned in this article. Try any of our Foolish newsletter services free for 30 days. 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.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers