The technology-heavy Nasdaq Composite (^IXIC +0.88%) may be nowhere near its all-time high -- unlike the Dow Jones Industrial Average and the S&P 500, which are either at or very near new records -- but the Nasdaq still managed to close at a 12-and-a-half-year high yesterday.
Despite the Nasdaq's incredible run since its March 2009 lows, not all investors are sold that things are getting better. As I did last month, today I'd like to more closely examine the Nasdaq's most short-sold companies, figure out why investors may be pessimistic about them, and see whether that pessimism is warranted.
|
Company |
Short Interest as a % of Shares Outstanding |
|---|---|
|
Coinstar (CSTR +0.00%) |
47.4% |
|
Questcor Pharmaceuticals (NASDAQ: QCOR) |
45.88% |
|
Affymax |
42.22% |
|
Bio-Reference Laboratories (BRLI +0.00%) |
37.1% |
|
Spectrum Pharmaceuticals (SPPI +0.00%) |
36.93% |
Source: S&P Capital IQ.
Coinstar
Why are investors shorting Coinstar?
- The reason Coinstar lands atop the Nasdaq's most short-sold companies for the second month in a row has to do with its reliance on the DVD rental business. Fewer consumers are turning to DVD rentals these days, when convenient streaming content is available through their computers and televisions. This was confirmed in Coinstar's first-quarter report, which showed that Redbox sales grew by less than 1% and would likely have fallen had the company not added more kiosks from the year-ago period.
Is this short interest deserved?
- Despite a nearly 3-percentage-point month-over-month drop in short interest, I still feel Coinstar's growing pains as it transitions into digital streaming will depress its share price over the next few years. There may come a time where cash flow alone makes Coinstar attractive, but I adamantly disagree with CEO Scott di Valerio, who believes Redbox can grow DVD rentals by 5% to 10% over the next three years: There is conclusive evidence from Netflix and Redbox's own sales that the DVD business is slowly shrinking.
Questcor Pharmaceuticals
Why are investors shorting Questcor Pharmaceuticals?
- Questcor's short interest rose slightly from the previous month, and the pessimists will point to three reasons to bet against this biopharmaceutical company: an ongoing U.S. probe into its marketing practices, a scathing report by short-selling specialist Andrew Left of Citron Research last summer, and a recent earnings report that delivered a $0.20 bottom-line EPS miss on lower shipments of its lead drug, Acthar.
Is this short interest deserved?
- My Foolish colleague Keith Speights recently presented one reason not to be too worried when he closely examined Questcor's first-quarter results and noted that the drop in shipments could be simply a temporary fall in multiple-sclerosis shipments since April's Acthar shipments hit a record high. As for me, with so many gray clouds still hanging over the company, I suggest that investors abstain from taking either a long or short position.
Affymax
Why are investors shorting Affymax?
- I believe the better question is why investors would not be shorting Affymax. Shares of the biotechnology company were taken to the woodshed in late February when it and licensing partner Takeda Pharmaceuticals announced the voluntary recall of anemia drug Omontys following a few rare instances of adverse events, including anaphylaxis and death. With the drug pulled from market, Affymax is no longer generating any revenue.
Is this short interest deserved?
- Abso-freakin-lutely! Affymax's Omontys is its only FDA-approved drug, and the only two other compounds in its pipeline involve the use of Omontys. The adverse events generated by Omontys don't appear to be an easy "fix," which leads me to believe things could get a whole lot worse before they have a shot at getting better.
Bio-Reference Laboratories
Why are investors shorting Bio-Reference Laboratories?
- Speaking of health care companies taking the brunt of pessimism, Bio-Reference Laboratories, which provides clinical testing services, has drawn the ire of short-sellers after a former employee filed a whistle-blower lawsuit in New Jersey, alleging wrongful termination and unlawful billing practices. While Bio-Reference is innocent until proven guilty, Andrew Left of Citron Research threw in his two cents, saying he expects this could be just the tip of the iceberg of wrongdoing yet to be uncovered.
Is this short interest deserved?
- This is a tough call, because on one hand revenue rose by 16% in the most recent quarter (though it missed estimates), while EPS grew to $0.31 from $0.26 in the year-ago period, topping Wall Street's expectations. On the other hand, the looming lawsuit is only added weight on the backs of shareholders. As with Questcor, I'd keep a close eye on Bio-Reference Labs but stay on the sidelines for now.
Spectrum Pharmaceuticals
Why are investors shorting Spectrum Pharmaceuticals?
- Just as we saw last month, short-sellers are dog-piling Spectrum Pharmaceuticals after it drastically lowered its full-year revenue forecast on increased generic competition for palliative metastatic colorectal cancer treatment, Fusilev. With Spectrum yet to report its quarterly results, investors have been privy to an endless parade of class-action lawsuits filed against the company on behalf of shareholders.
Is this short interest deserved?
- Until Spectrum proves otherwise in its quarterly results, I believe the high amount of short interest here is well-deserved. Fusilev comprises a big chunk of Spectrum's sales, and that chunk is only likely to be eaten away by increasing generic competition. At the moment, Folotyn and Zevalin are growing, but they're simply not growing quickly enough to return Spectrum to a profit.
Do you feel these most hated companies have been unfairly punished? Share your thoughts in the comments section below.
