The technology-heavy Nasdaq Composite (^IXIC +1.71%) may be a long way off from its all-time highs set during the dot-com bubble, but that hasn't stopped it from setting a fresh 12-year high on multiple occasions this year.
Like the rest of the market, the Nasdaq has benefited from a rapid return to growth that has been fueled by record low interest rates. Many tech companies have been able to take advantage of these rates by refinancing existing debt to a much lower interest rate (thus saving on their interest expenses) or by expanding their operations through acquisitions.
But just as we saw when the Nasdaq peaked more than a decade ago, not all investors are driving down the same road. Some traders view the Nasdaq and its components as overvalued and are building fairly sizable short interest positions in some of the Nasdaq components. With that in mind, let's have a look at last month's five most hated stocks within the Nasdaq Composite -- in essence, the most short-sold companies -- and see what characteristics, if any, they share so we can avoid buying into similar companies that have drawn the ire of short sellers in the future.
|
Company |
Short Interest as a % of Outstanding Shares |
|---|---|
|
GT Advanced Technologies (NASDAQ: GTAT) |
43.07% |
|
SodaStream International (SODA +0.00%) |
38.02% |
|
NII Holdings (NASDAQ: NIHD) |
37.42% |
|
Ebix (EBIX +0.00%) |
37.33% |
|
Uni-Pixel |
37.14% |
Source: S&P Capital IQ.
GT Advanced Technologies
Why are investors shorting GT Advanced Technologies?
- The thesis behind a pessimistic bet against GT Advanced Technologies hinges on the China solar sector vastly underperforming all other solar providers. GT Advanced Technologies, or GTAT for short, supplies equipment to solar and LED companies, primarily in China. With Chinese solar producers caring less about margins and choosing to pump out as much product as they can, they're relying less on R&D and more on GTAT to innovate and keep their solar panels on par with other global manufacturers. Short sellers are anticipating that China's solar industry will fall flat on its face, and GTAT with it.
Is this short interest deserved?
- As much as I dislike the Chinese solar industry, there are so many players that even one or two bankruptcies wouldn't have much of an effect on GTAT. With the Chinese government giving the go-ahead to its domestic solar industry that it plans to promote 35 GW of production by 2015, I'd certainly say that GTAT is going to remain busy -- and should be profitable. With such a high level of short interest built up in the stock already, I'd surmise that short sellers should be mighty concerned here.
Source: DebMomOf3, Flickr.
SodaStream International
Why are investors shorting SodaStream?
- Unlike GTAT, the reasoning behind the heavy short interest in SodaStream doesn't require investors to connect the dots. Very simply, investors are betting on a weak earnings report from the at-home soda machine maker. It's not completely inconceivable that a bad report could surface, either, with the stock losing more than 50% of its value two summers ago on weak growth forecasts despite its rapid growth rate. Valuation has also been another big concern of short sellers, who have a hard time justifying the purchase of a company trading at 27 times trailing earnings.
Is this short interest deserved?
- Would a "Heck, no!" about cover it? For a while I, too, was one of those valuation mongers who couldn't get past SodaStream's (at the time) P/E around 50. But times change. SodaStream is now seriously giving Coca-Cola and PepsiCo. a run for their money and its competitors are beginning to take notice. In SodaStream's second quarter, the company delivered 29% sales growth as adjusted EPS rose by 42%. Instead of slowing down, rumor on the Street is that SodaStream remains an attractive buyout candidate. This isn't the first time we've heard this rumor and it's unlikely to be the last. With solid growth prospects, a forward P/E of just 18, and a revolutionary product, I'd say it's the short sellers who have everything to worry about.
NII Holdings
Why are investors shorting NII Holdings?
- Of the five most hated Nasdaq stocks, the pessimism against NII Holdings is by far the easiest to understand. NII Holdings, a wireless communications service provider in Central and South America, has struggled over the past couple of quarters with ballooning losses, higher debt levels, and weaker revenue from existing users. With subscriber rates and competition already high in many of the regions that it operates, short sellers see very little margin for improvement in NII's bottom-line results.
Is this short interest deserved?
- If you took the time to dig into NII Holdings' second-quarter report last month, you'd be wondering why this isn't the most short-sold stock of the bunch. Despite adding 100,000 net new subscribers, consolidated average revenue per user (i.e., the holy grail metric of margins for wireless service providers) fell about $5 to $36 from the year-ago period and the company had brought $1.6 billion in new bonds to market this year. Perhaps even more terrifying, its quarterly loss of $2.30 per share was more than double what Wall Street expected . This is the epitome of a perfect stock for short sellers.
Ebix
Why are investors shorting Ebix?
- Like the previous two companies, there's no riddle to be found as to why short sellers have piled into Ebix, a software and e-commerce solutions provider to the insurance industry. As Fool Brian Shaw notes, after repeated attacks by short sellers, an investigation into allegations of intentional misconduct within the company was opened by the U.S. Attorney for the Northern District of Georgia. This investigation served as the perfect escape clause for a Goldman Sachs affiliate to back out of its proposed $20/share buyout of Ebix in June. With the investigation still ongoing, short sellers are betting on further downside.
Is this short interest deserved?
- While you may be innocent until proven guilty in court, on Wall Street investors often take the exact opposite approach. With Ebix under investigation for intentional misconduct, any hope of a merger or buyout has been effectively wiped from the table. Worse yet, the longer this probe drags out, the worse it could hurt Ebix's business from a PR perspective. On one hand, Ebix could come out clean as a whistle and investors can once again focus on its ridiculously inexpensive P/E of 7. Then again, if this investigation does turn up some level of intention wrongdoing, let's just say I wouldn't want to be an Ebix shareholder. Far too many questions make Ebix a stock to avoid.
Uni-Pixel
Why are investors shorting Uni-Pixel?
- For short sellers, the case against Uni-Pixel is one of too far, too fast. The company develops flexible electronic film, which, according to Foolish colleague Steve Symington, will be a $32 billion market by 2018. However, prior to this year, Uni-Pixel had only brought in $76,000 in total annual revenue and was planning to go from practically zero production to a major ramp-up in orders. Short sellers have to believe that competition in this space, as well as expansion hiccups, will hamper Uni-Pixel.
Is this short interest deserved?
- Although the technology is incredibly cool, I don't see any reason why short sellers won't be right until Uni-Pixel's bottom line proves them wrong. The threat of Apple becoming a competitor, coupled with its inexperience in ramping up a product line gives me enough cause for concern to believe that short sellers will remain on the offensive here.
