3 Nasdaq Stocks Investors Love to Hate

Don't look now, but it appears that the technology-heavy Nasdaq Composite (NASDAQINDEX: ^IXIC  ) is again slowly marching toward a multi-decade high. Just when it looked as if a viable correction in social media and biotechnology stocks would drag down the mighty Nasdaq, a slew of positive economic data followed by a rebound in highly volatile stocks has led the index higher once again.

On the surface there are plenty of factors that could help push the Nasdaq even higher. The U.S. unemployment rate, for example, touched its lowest levels in years recently at 6.3%, implying that people are having an easier time finding work. In addition, a lower unemployment rate would suggest that consumers have more disposable cash to spend. Since consumer spending accounts for roughly 70% of GDP, the precipitous drop in the unemployment rate is pivotal to a growing economy.

Aside from the unemployment rate, a number of other metrics have been improving, including factory orders, which hit an all-time high earlier this week, as well as housing prices, which, according to the Case Shiller 20-City Index, are seeing increases of better than 12% year over year.

However, you won't have to look far to find investors who are utterly opposed to the Nasdaq heading any higher -- and with good reason. The unemployment rate, for instance, is primarily down because the labor force participation rate has been dropping for the better part of the decade as baby boomers retire and drop out of the workforce. In terms of real non-farm jobs growth, we're basically flat over the past six years.

Additionally, top-line corporate growth has been practically nonexistent, with companies turning to cost-cutting and share buybacks in order to give the appearance that their bottom lines are growing. While this does work for short periods of time, cost-cutting and share buybacks aren't long-term solutions to replace a lack of organic growth.

With this in mind, let's 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  )

48.06%

World Acceptance (NASDAQ: WRLD  )

40.35%

VIVUS (NASDAQ: VVUS  )

35.62%

Source: S&P Capital IQ.

Myriad Genetics
Why are investors shorting Myriad Genetics?

  • Another month may have passed, but not a lot has changed with the bear thesis against molecular diagnostics company Myriad Genetics. At the center of investors' skepticism is the fact that its BRACAnalysis test used to test for the BRCA 1 & BRCA 2 genes makes up close to 70% of its total revenue. This weighting wouldn't be so concerning had the company not had select patents invalidated last year which had been protecting BRACAnalysis from competition. In addition, the Centers for Medicare and Medicaid Services, which proposes reimbursement rates for these tests, enacted a hefty Medicare price cut for the upcoming year. Added together, increased competition for its lead product and reduced Medicare reimbursement rates have investors thinking that Myriad could be in trouble. 

Is this short interest warranted?

  • It's possible that both the aforementioned factors could eat into Myriad's BRACAnalysis sales, but the time to bet against Myriad Genetics appears to have come and gone. The company's diagnostics portfolio is rapidly expanding and presentations at the American Society of Clinical Oncology just this past week show that its BRACAnalysis CDx test used as a supporting diagnostic in metastatic breast cancer patients helped lead to a better than doubling in platinum-based therapy response rates for the screened group compared to the non-screened group. In other words, the opportunity for companion diagnostic tests and personalized medicine is only increasing, which, when added to recent purchase of Crescendo Bioscience in February, gives Myriad a better than 50-50 shot at long-term success, in my opinion.

World Acceptance
Why are investors shorting World Acceptance?

  • Similar to last month, payday lender World Acceptance finds itself among the Nasdaq's 3 most hated stocks following an ongoing investigation into possible violations of consumer protection laws by the Consumer Financial Protection Bureau. Although World Acceptance has asserted that it's done nothing wrong, it certainly didn't sit well with investors yesterday when it was announced that its auditor, KPMG, needed additional time to finishing auditing the company's financial results for the year ended March 31, 2014.


Source: HelenCobain, Flickr.

Is this short interest warranted?

  • Generally speaking, payday lenders have a pretty simple life: They charge high interest rates on short-term loans and often come out ahead even with a high non-collection rate. However, an investigation into possible violations of consumer protection laws is an easy reason for optimists to draw the line and cut their ties from World Acceptance. It's quite possible that the company has done nothing wrong, and if that's the case it could shoot right back up to a triple-digit share price. But if the CFPB does find that World Acceptance has violated some tenets of the consumer protection laws, it's possible the company could face hefty fines and a damaged reputation that adversely affects its business for years to come. Even though the company appears cheap at just six times forward earnings, I wouldn't be charmed by its valuation just yet, and would patiently wait for the CFPB's findings before making a move as a buyer or short-seller.

VIVUS
Why are investors shorting VIVUS?

  • Lastly, we have weight control drug producer VIVUS, which continues to attract the vultures following another disappointing quarter for weight-loss drug Qsymia. For the first quarter, total prescriptions filled dropped nearly 3% to 121,000 from the 124,000 it logged in the sequential fourth quarter. Thankfully for shareholders, milestone revenue from its licensing of Stendra/Spedra has kept VIVUS from sinking even further, as has a recent 13-D filing from Aspen Investments revealing a 9.65% stake in the company and announcing Aspen's possible intent to make up to a $640 million bid for the company by June 13. With losses expected for at least the next few years, short-sellers are not sold on VIVUS' ability to survive without heavy dilution.


Graph by author, Source: VIVUS quarterly filings. 

Is this short interest warranted?

  • Of the three stocks mentioned here I would say that VIVUS is the most logical short-sale opportunity by a long shot. Sales of Qsymia, despite having blockbuster potential when approved, have been absolutely abysmal. Qsymia already has a less favorable safety profile when compared to its peer, has had difficulty getting insurers to jump on board and cover its weight-loss drug, and, to add icing on the cake, has no marketing partner. Making matters even worse, clinical-stage competitor Orexigen Therapeutics (NASDAQ: OREX  ) has already run a massive cardiovascular outcomes study for its investigational weight-loss drug Contrave, which showed it did not increase the potential for adverse cardiovascular events in an interim analysis. Long story short, if approved it's likely to be a top choice over Qsymia. This means ongoing losses for VIVUS and perhaps a merciful end through a buyout by Aspen Investments -- but even that's no guarantee.

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