3 Stocks with More than 50% Short Interest
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A heavily shorted stock does two things: It keeps a stock underperforming for long periods of time, but then it also allows for the potential of incredible gains with just one decent headline. In this article I am looking at three of the most shorted S&P 500 stocks (as of Feb. 28) and determining what could cause the shorts to cover.
#1 Looks Cheap But Has Many Questions Unanswered
The candle and home fragrance maker Blyth (NYSE: BTH) leads the list as the most shorted in the S&P 500, with 68.19% of its float short. The $280 million company has seen 60% of its value disappear in the last six months, which all began following a downgrade by Moody’s to negative. The remainder of its loss came after the company pulled a planned IPO of the weight-management product business ViSalus, despite growth “in excess of 450% in 2012.”
This pulled IPO was supposedly due to sluggish market conditions. Basically, this meant that the company could draw no interest in the IPO, and therefore all news surrounding the company and this business has led to volatile swings in the stock. Furthermore, there have been a lot of rumors circulating that the company is a “pyramid scheme,” as the stock has been drastically affected by the Herbalife saga.
Looking at the stock, the only way it will appreciate is with continued growth in its ViSalus segment. However, pessimism of this degree will not leave overnight; it could take years to change. In the meantime the stock “appears” cheap.
#2 Showing All the Signs of Losing Market Share
While Netflix soars higher, shares of Coinstar (NASDAQ: OUTR) continue to underperform despite similar growth. The stock has 52.00% of its float short, and has lost 10%of its value over the last 12 months. Basically, shorts are waiting for this company to fail miserably, and there are many who believe that such a failure is looming.
There is a wide belief that the company is losing market share of its video business to Netflix, and also a belief that its Coinstar machines are reaching a saturation point where growth will be difficult to achieve. With a forward P/E ratio of 9.57 and a price/sales of 0.72 it is hard to debate that the stock is cheap.
However, the issue is growth and market share, and in order to create significant gains, and rid the shorts, the company must produce growth and prove that its core businesses are in fact stable. And seeing as how Coinstar is somewhat a technology company, it might be a good idea that it begins to innovate…. just a thought!
#3 Shorts Proven to Be Right, But Will they Move on to Better Opportunity?
In third place is Spectrum Pharmaceuticals (NASDAQ: SPPI), with 51.64% short, and last week this is one bet that shorts won. The stock has lost 41% of its value in the last five days alone, and this occurred after a corporate update showed a 60% drop in Fusilev demand.
Fusilev is its best-selling drug, and for the last year the company has continuously denied rumors of slashing prices to compete with generics. The company even went as far to guide for an increase in sales, saying that total sales would rise in 2013.
Now, the company is guiding for revenue of about $170 million, which is far short of the expected $300 million. Following this large loss, I will be curious to see if shorts back off due to the company having a large pipeline and two other approved drugs, although I doubt it, seeing as how this has been a short’s goldmine.
Therefore, Spectrum has two ways in which it could rid the shorts: A shortage of generic Fusilev that leads to a boost in sales or significant growth from either of its two other approved products. Until one of these two occur, we can most likely expect more of the same.
If you look strictly at just the fundamentals/valuation of these three companies then you would find that all appear quite cheap. However, it’s important to remember that when a large collection of short sellers migrate to a particular stock, it is usually for a reason. Therefore, when investing in these companies, there is magnificent upside, but there is also large downside, making it a high-risk high-reward investment, and not always a value investment.
Brian Nichols has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!