Shares of programmable chip builder Xilinx (Nasdaq: XLNX) should come with a warning label attached: "CAUTION: This security contains several red flags. Consult SEC filings before buying."

More than 10% of the stock's public float is sold short, putting it in league with much-maligned tech papers such as the stagnant Level 3 Communications (Nasdaq: LVLT), mysterious Renren (Nasdaq: RENN), and one-trick pony OmniVision Technologies (Nasdaq: OVTI) (though I happen to think that OmniVision's single trick is pretty good).

And it's not heavily shorted without reason, either:

  • Only 0.1% of Xilinx is owned by insiders, so management's goals may not be terribly well aligned with those of shareholders.
  • Next to chief rival Altera (Nasdaq: ALTR), Xilinx sports both thinner margins and slower growth, which means we're not looking at a best-of-breed operation here. It should come as no surprise that Altera's shares have outperformed Xilinx over the last year -- or five.
  • Our own Big Short newsletter sees numerous red flags on the balance sheet alone, including bloated inventories and a recent surge in accounts receivable. Yep, our analyst team recommends shorting Xilinx.

The just-reported take baby steps toward resolving some of these issues: The cash conversion cycle is slimming down dramatically, partly thanks to tighter accounts receivable trends. Inventories are still very full, though down slightly from last quarter's peak.

Sales in the quarter were surprisingly strong at $616 million, on the back of strong sales into the wired communication and data processing end markets. Communication chips in India are expected to drive growth in the coming quarter. The company's $0.56 of earnings per share beat Wall Street expectations of $0.53, and share prices climbed modestly on the news.

So has Xilinx dispelled every worry? Not hardly. While the improved cash conversion cycle is encouraging, margins still lag its fiercest rivals and management isn't exactly buying tons of shares. And with P/E ratios in line with industry peers, Xilinx doesn't even reward you for accepting all these red flags with a deep-discount share price.

If this stock still intrigues you, feel free to add Xilinx to your Foolish watchlist. While waiting for substantial improvement in this company, I can offer you a raft of better investments to make right now:

Fool contributor Anders Bylund holds no position in any of the companies discussed here. Motley Fool newsletter services have recommended shorting Xilinx. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. You can check out Anders' holdings and a concise bio, follow him on Twitter or Google+, or peruse our Foolish disclosure policy.