3 Stocks Even Volatility-Loving Nasdaq Investors Hate

The Nasdaq Composite may be hitting a multidecade high, but pessimists are piling into these three Nasdaq-listed stocks. Are things really as bad as these short-interest figures indicate?

Jul 2, 2014 at 6:16PM

Another month is in the books for the volatile and highly tech-centric Nasdaq Composite (NASDAQINDEX:^IXIC), and surprise, surprise -- it was a positive month! Out of the 21 trading sessions in June, the Nasdaq advanced on two-thirds of all days and gained 3.9% for the month.

Overall, the basis for the rally continues to be intact. The latest unemployment report signaled that the jobs market is continuing to improve, while manufacturing and factory order readings have regularly been exceeding Wall Street's consensus. Further, consumer confidence figures have been rising to multiyear highs. Although consumer confidence figures aren't a concrete gauge of economic activity, they do measure consumers' short-term and long-term economic-outlook expectations. If this figure is rising it could lead to a rise in spending which would fuel U.S. GDP growth.

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Source: Bfishadow, Flickr.

But just as investors have been given ample reasons to love this rally, there are also an equally large number of reasons for skeptics to worry. For starters, a steady drop in the labor force participation rate, coupled with the relatively long amount of time required for the unemployed to find work, has masked the realities of the reported 6.3% unemployment rate.

Perhaps more worrisome is the fact that a good number of companies have turned to strict cost controls and share repurchase programs in order to mask the fact that top-line growth is anemic. While cost-cutting does work for a short period of time, it's not a long-term solution, and skeptical investors know this.

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)

50.84%

World Acceptance (NASDAQ:WRLD)

41.24%

VIVUS (NASDAQ:VVUS)

39.3%

Source: S&P Capital IQ

Myriad Genetics
Why are investors shorting Myriad Genetics?

  • All things considered, it was a relatively quiet June for Myriad Genetics, so the basis for pessimism against the company remains largely unchanged from the previous month. The primary reason skeptics have continued to place Myriad atop the list of the Nasdaq's most hated stocks is the Supreme Court's decision last year that invalidated some of the key patents which Myriad has been using to protect its BRACAnalysis test from competition. This ruling allowed competition to enter the playing field, which is significant since BRACAnalysis comprises around 70% of Myriad's total revenue. Furthermore, the Affordable Care Act has pushed the Center for Medicare and Medicaid Services to drastically cut reimbursement rates for Myriad's BRACAnalysis test, pressuring its top and bottom lines.

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Source: John Goode, Flickr.

Is this short interest warranted?

  • There are certainly reasons for skepticism given the introduction of new competition and the CMS reimbursement rate reduction. But investors should understand that the CMS rate reductions only affect those being covered by Medicare and Medicaid, which represents a minority of Myriad's customers. Also, Myriad's pipeline is beginning to expand well beyond just BRACAnalysis. The company purchased Crescendo Bioscience in February in order to expand its diagnostics product line and presented encouraging data on its myPath melanoma test as the American Society of Clinical Oncology's annual meeting in early June. With a beefed up sales and profit forecast I wouldn't suggest betting against Myriad.

World Acceptance
Why are investors shorting World Acceptance?

  • In similar fashion to Myriad Genetics, not much has changed for payday advance servicing company World Acceptance ... other than the fact that more class action lawsuits have been filed on behalf of investors against it since last month. World Acceptance has been a bull's-eye for short-sellers since the Consumer Financial Protection Bureau opened in an investigation into possible violations of consumer protection laws in mid-March. Although World Acceptance has denied the allegations, skeptics are obviously anticipating that the company will be found guilty of some form of wrongdoing.

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Source: Taber Andrew Bain, Flickr.

Is this short interest warranted?

  • On one hand, if World Acceptance winds up being vindicated, then its forward P/E of roughly six could propel its shares considerably higher. Even if World Acceptance is found guilty of wrongdoing by the CFPB but isn't fined, its shares could still soar. But if the CFPB finds World Acceptance guilty and slaps the company with a fine then shares could be hit even more than they already have been and the numerous class action lawsuits filed against the company could prove successful in collecting further damages for shareholders. The sad reality of the CFPB's investigation is that it could carry on for months, leaving existing shareholders to question what could happen next. This is a situation that bears avoidance for both optimists and pessimists.

VIVUS
Why are investors shorting VIVUS?

  • To make it something of a trifecta, VIVUS's short interest has increased month over month for many of the same reasons as last month. The primary point of pessimism is the disappointment surrounding weight control management drug Qsymia. In the first quarter VIVUS, despite handily topping Wall Street's EPS estimates with a smaller loss, delivered a nearly 3% drop in sequential quarterly prescriptions written for Qsymia to 121,000. You have to remember that at one time Qsymia was expected to be a potential blockbuster. In its latest quarter -- after six quarters on pharmacy shelves -- it tallied just $9.1 million in sales. Simply put, skeptics anticipate that losses for VIVUS will continue for years to come, with the company burning through its remaining cash and diluting investors with additional share offerings.

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Source: VIVUS.

Is this short interest warranted?

  • Skeptics should keep in mind that Aspen Investments, which owns a 9.7% stake in VIVUS, may eventually try to take it private for about a 20% premium to its current price. Clearly the potential of that happening isn't being priced in at the moment, but for a large shareholder like Aspen, it's not out of the question. But for all intents and purposes, VIVUS continues to resemble one of the strongest short-sale opportunities among Nasdaq-listed stocks. VIVUS is losing money, it's lead drug has fallen flat on its face, it has no marketing partner, and worst of all, if rival Orexigen Therapeutics' (NASDAQ:OREX) Contrave is eventually approved, the simple fact that it will have completed an extensive cardiovascular outcomes study (known as the Light Study) and delivered comparable weight-loss totals could push it to the forefront well ahead of Qsymia. In my opinion, VIVUS remains an "all-out avoid" stock.

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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 has no position in any of the stocks mentioned. 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.

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