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The Nasdaq's 5 Most Hated Stocks

By Sean Williams - Apr 6, 2013 at 4:30PM

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Short-sellers are piling into these five most-hated Nasdaq components. Is their pessimism warranted?

Although the Nasdaq Composite (^IXIC 3.33%) is the only major U.S. index that's nowhere near its all-time high, it still turned in an impressive gain of 8.2% for the quarter. Gains were broad-based, with everything from technology and health care to energy and financials helping the index.

However, the optimism among investors wasn't shared by some. Weakening consumer-confidence figures in recent months would suggest that consumers are more cautious about the overall economy -- a perfect scenario to persuade short-sellers to dig in their claws. Here's a look at the five most hated stocks in the Nasdaq Composite that have drawn the ire of short-sellers:

Company

Short Interest As a % of Shares Outstanding

Coinstar (OUTR)

50.12%

Spectrum Pharmaceuticals(SPPI 4.57%)

44.47%

Questcor Pharmaceuticals (NASDAQ: QCOR)

43.10%

Uni-Pixel

42.73%

SodaStream International(SODA)

39.96%

Source: S&P Capital IQ.

As we've done previously, I suggest we look at the various reasons why short-sellers may have homed in on these five companies and decide whether the pessimism is justified.

Coinstar
Why are investors shorting Coinstar?

  • The reason short-sellers have barreled into Coinstar has to do with the company's reliance on the DVD-rental business and the expectation that its sales will shrink in a similar fashion to Netflix's DVD sales. Coinstar's most recent quarterly profit blew past estimates, and it did forecast revenue growth of 12% at the midpoint for its current fiscal year, but the proliferation of streaming services is expected to take a big bite out of Coinstar's margins.

Is this short interest deserved?

  • Having 50% of the outstanding shares being held short as a short-squeeze is a genuine concern, but I can definitely understand the pessimism surrounding Coinstar. If Coinstar's margins are anything like Netflix's, then its DVD business generates double the margins that the streaming business will in a like-for-like comparison. This means Coinstar probably has a few years of growing pains in its immediate future.

Spectrum Pharmaceuticals
Why are investors shorting Spectrum Pharmaceuticals?

  • Short-sellers had already been skeptical of Spectrum Pharmaceuticals' palliative metastatic colorectal cancer treatment, Fusilev, long before the stock nosedived in March. Generic competition for the drug was available, but shortages of those generics had encouraged Spectrum's management to expect sales growth in 2013. That turned out to be all for naught, as Sagent Pharmaceuticals stepped up to fill the generic void and Spectrum lowered its full-year sales forecast by 40% to 47% at the top and bottom end. 

Is this short interest deserved?

  • As much as I'd like to think that traders overreacted to Spectrum's warning, the massive reduction in Fusilev sales is going to push the company into the red in 2013 and may it keep it there for some time. Folotyn and Zevalin could help move Spectrum back to a profit as soon as next year, but the uncertainties surrounding Fusilev, by far its biggest revenue generator, are too great to suggest buying in even here.

Questcor Pharmaceuticals
Why are investors shorting Questcor Pharmaceuticals?

  • Two words succinctly describe why Questcor has been pummeled by short-sellers: FDA probe. The Food and Drug Administration announced a probe into Questcor's marketing practices in September of last year, with the premise being that it seemed odd that the orphan drug maker of Acthar Gel would charge $23,000 per vial across all 19 indicated treatments. However, Questcor's bottom-line figures would tell another tale, with the company reporting a net sales jump of 113% and adjusted EPS growth of 132% in the fourth quarter. 

Is this short interest deserved?

  • The perception of doubt definitely exists, with noted short-seller Andrew Luck of Citron Research issuing a scathing report on Questcor over the summer. The FDA probe isn't a welcome sign for investors either. But FDA probes end with no monetary penalties as often as they end with them, so it's somewhat of a toss-up what to expect with the FDA's research into Questcor's marketing practices. For now, I'd suggest abstinence and avoid the company altogether from both a long and short perspective.

Uni-Pixel
Why are investors shorting Uni-Pixel?

  • The pessimism surrounding Uni-Pixel certainly has nothing to do with its results, as the flexible-electronics manufacturer announced a multimillion-dollar deal with an unnamed PC maker and struck a collaborate deal with Texas Instruments all within the past few months. What has investors unnerved is the 412% run the stock has had in less than six months despite reporting just $76,200 in revenue last year. 

Is this short interest deserved?

  • I'd absolutely say some skepticism is in order, considering that Uni-Pixel is practically a micro-cap company that's ramping up production for the first time in its history and has never turned a profit. I, for one, would really like to see Uni-Pixel prove its value in the earnings column before investors jumped aboard this rocket. Conversely, highly short-sold micro-and-small-cap companies have a penchant for disappointing short-sellers with short squeezes. In other words, tread wisely.

SodaStream International
Why are investors shorting SodaStream International?

  • Investors seem bent on betting against SodaStream for a number of reasons, with the most obvious being that the convenience factor of simply purchasing a 2-liter soda is so much easier than purchasing the individual soda components and making it yourself. A trend toward healthier living habits is also working against SodaStream, which is finding it more difficult to push its soda products on a consumer base that desires to get in shape.

Is this short interest deserved?

  • I have been decisively negative on SodaStream since its debut, but I'm about ready to turn the corner on that opinion. SodaStream's products are right in the sweet spot for most investors -- $80 to $200 for the machines -- and it's valued at only 15 times forward earnings despite an expected growth rate of 15% next year. Assuming it can take my fellow Fool Rick Munnariz's suggestions and move into the wellness market, as well as expand its partnerships, I could see short-sellers potentially getting burned here. 

Which most-hated Nasdaq company do you have on your radar? Share your thoughts in the comments section below.

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Stocks Mentioned

NASDAQ Composite Index (Price Return) Stock Quote
NASDAQ Composite Index (Price Return)
^IXIC
$12,131.13 (3.33%) $390.48
Spectrum Pharmaceuticals, Inc. Stock Quote
Spectrum Pharmaceuticals, Inc.
SPPI
$0.74 (4.57%) $0.03
SodaStream International Ltd. Stock Quote
SodaStream International Ltd.
SODA
Coinstar, LLC Stock Quote
Coinstar, LLC
OUTR

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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