Whether it's true or not, a short-seller report can often send shares of a stock plummeting in a hurry. That's what has happened to genetic testing company Natera (NTRA 4.49%), which has fallen after a report criticizing its business made investors think twice about the stock.
From a share price of more than $54 before the report came out, the stock is now trading at around $35, down over 30% in just one week. Should investors continue selling this stock, or does Natera's recent decline make it the ideal contrarian pick to add to your portfolio?
Hindenburg alleges the company engages in deceptive billing practices
On March 9, Hindenburg Research released a report that referred to Natera as "pioneers in deceptive medical billing." It claimed that the company's marketing material was suggesting to patients that its tests would only cost a few hundred dollars, but they would receive bills for much more than that. It cites complaints from the Better Business Bureau, where the company has a 1.1 rating out of five based on 139 reviews. In an era of fake reviews that can be bought and sold, however, investors nowadays have to take online comments with a grain of salt.
A common challenge with these types of short-seller reports is that a lot depends on hearsay, and there are more than a dozen references to an unnamed "former employee" in the Hindenburg report. It makes it impossible for investors to verify the accuracy of such claims. And with short-seller reports, the goal is often to send the stock price down. And in the report, Hindenburg does state that it has a short position in Natera, meaning that it would stand to profit from a decline in the stock's price.
Natera was quick to respond to the report, calling it "misleading" and that it was the same story as what short sellers have said about its business in the past. The company referred to the more than 100 peer-reviewed publications its tests have been involved in as proof of their legitimacy and accuracy. And that out of 1.5 million tests it performed in 2021, it notes that there were only 82 patients who gave negative comments to the Better Business Bureau.
A look at the company's track record
For investors, discerning how much truth is in the short-seller report is difficult, if not impossible; any large business will have disgruntled employees more than willing to say how the business is broken or destined to fail. Instead, a better approach would be to evaluate the company's overall financial performance. It's also important to note that Natera has been issuing quarterly and annual reports since going public in 2015. During that time, those reports would have faced scrutiny from both the public and the company's own auditors.
And the proof is often in the numbers. There are more checks and balances in a post-Enron world to protect investors from misleading earnings reports. If Natera were truly defrauding insurance companies and patients, that would likely be uncovered, especially given how important the tests are for patients. Natera's cell-free DNA tests focus on organ health, oncology, and women's health, including prenatal screening. And from 2017 through 2021, the company's top line tripled, growing from $211 million to $625 million. This year, it anticipates that its revenue will be between $770 million and $790 million. These are all encouraging signs that the business is doing something right and that patients are continuing to take its tests.
But despite this strong top-line growth, Natera has consistently incurred losses over the years and has burned through cash along the way. While that doesn't mean it's engaging in fraudulent activities, it does suggest there's considerable risk with investing in the business.
Is the short-seller report a reason to avoid Natera?
Although the short-seller report may sound concerning, it shouldn't affect your decision to buy or sell this healthcare stock. If you were bullish on Natera before the report, this shouldn't alone change that outlook. There's still going to be a risk in holding the stock, given the company doesn't turn a profit and it is burning through cash, but the short-seller report itself doesn't make the stock any riskier. The report may impact the stock in the short term, but given the lack of hard evidence that it contains, it isn't likely to have a lasting effect on Natera's shares over the long haul.