Outlook for the Most Shorted Stocks

Brian is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

When you look at the S&P 500’s most shorted stocks, all are cheap yet short investors continue to bet on lower prices. Therefore, I am looking at the most shorted stocks according to Bespoke Investment Group’s monthly list, to determine if any are a “buy.”

<table> <thead> <tr><th> <p>Company</p> </th><th> <p>Short-Interest vs. Float</p> </th><th> <p>Shares Short (4/30)</p> </th><th> <p>Shares Short (3/30)</p> </th></tr> </thead> <tbody> <tr> <td> <p><strong>Blyth <span class="ticker" data-id="203007">(NYSE: <a href="http://caps.fool.com/Ticker/BTH.aspx">BTH</a>)</span></strong></p> </td> <td> <p>68.36%</p> </td> <td> <p>5.62 million</p> </td> <td> <p>5.32 million</p> </td> </tr> <tr> <td> <p><strong>Questcor Pharmaceuticals <span class="ticker" data-id="207446">(NASDAQ: <a href="http://caps.fool.com/Ticker/QCOR.aspx">QCOR</a>)</span></strong></p> </td> <td> <p>50.86%</p> </td> <td> <p>27.15 million</p> </td> <td> <p>27.32 million</p> </td> </tr> <tr> <td> <p><strong>Coinstar <span class="ticker" data-id="203226">(NASDAQ: <a href="http://caps.fool.com/Ticker/OUTR.aspx">OUTR</a>)</span></strong></p> </td> <td> <p>45.07%</p> </td> <td> <p>12.46 million</p> </td> <td> <p>12.97 million</p> </td> </tr> <tr> <td> <p><strong>Bio-Reference <span class="ticker" data-id="203000">(NASDAQ: <a href="http://caps.fool.com/Ticker/BRLI.aspx">BRLI</a>)</span></strong></p> </td> <td> <p>41.23%</p> </td> <td> <p>10.11 million</p> </td> <td> <p>10.29 million</p> </td> </tr> <tr> <td> <p><strong>Spectrum Pharmaceuticals <span class="ticker" data-id="217087">(NASDAQ: <a href="http://caps.fool.com/Ticker/SPPI.aspx">SPPI</a>)</span></strong></p> </td> <td> <p>40.96%</p> </td> <td> <p>21.56 million</p> </td> <td> <p>22.17 million</p> </td> </tr> </tbody> </table>

A lack of catalysts continues to push this stock lower

In the last year, Blyth has lost almost 60% of its value. Yet despite trading with a price to sales of 0.22 shorts continue to pile into the stock, as shorts purchased 300,000 more shares in the month of April. Over the last month it has lost 13% of its value, thus Blyth continues to be a safe haven for shorts. When we look at the company as a whole, its revenue continues to decline, its margins are weak, and there is no interest for its ViSalus weight-management product business. In many ways, I feel sorry for longs, but with such a high short ratio, I don’t see it catching momentum anytime soon.

Strong growth, cheap price, and falling short ratio makes this stock intriguing

Questcor is now trading flat for the year, following its one-month 25.50% gain. In the last five days alone, the stock has gained 20%, indicating a potential short squeeze. If you look at the data above, we saw fewer shares short in the month of April, and as sales continue to grow more than 40% year-over-year, it’s very possible that this trend will continue. Therefore, I would keep an eye on Questcor, a stock trading at just 12 times earnings, as it could reverse very quickly to post large gains.

A stock lacking a much needed catalyst

A 500,000 share decline in those shorts should be no surprise considering the success of Netflix. Yet despite evidence that shorts are leaving the stock, Coinstar has still traded with a loss of 4% over the last month. The company has not done well at capitalizing in the streaming business and there are many reasons to believe that its DVD business is fading, due to restructuring on behalf of the company. With that said, the stock is cheap, and I don’t think it will take much to create a massive reversal. The key will be whether or not the company can create any good news, making Coinstar a wait-and-see stock, but definitely not a “buy” at the moment.

The risk is worth the reward

While most heavily shorted stocks trade with large yearly losses, Bio-Reference is really the opposite of what you expect with heavily shorted stocks. This is a stock that has risen 34% over the last year, including 22% in the last month, thus showing a short squeeze. The company continues to expect top-line growth of 15% and bottom-line growth of 20% throughout 2013. However, many fear that the company will encounter issues with health insurance companies to cover its diagnostic tests. As a result, the high short presence shows that many believe this to be true. As an investor, I do realize that these fears are real and could be crippling to the company. With that said, the stock is cheap at 13.70 times next year’s earnings and at just 1.15 times sales, meaning I think the risk is worth the reward.

No Reason to Buy this Stock

After years of being atop the list as the most shorted stocks, Spectrum Pharmaceuticals proved shorts to be correct when a generic Fusilev crushed the company’s guidance and its valuation. In the last month it has increased 15% and has seen its shares short decrease by 600,000 in the last month. As an investor who has followed the company closely and was very supportive of its direction, I feel that management was very misleading about generic Fusilev and that the stock is now too expensive compared to future sales and a lack of net profit. Thus I say that Spectrum will not be a buy until a new product is either brought to market or until the supply of generic Fusilev runs short.

Conclusion

When a company such as Regeneron Pharmaceuticals, Alexion Pharmaceuticals, or Netflix trade to levels that are obviously overpriced many bears will call for a downtrend. Yet sometimes these stocks can continue to rally on the mere fact that they have been solid performers and have produced consistent gains. The same can be said for heavily shorted stocks. While many look cheap, why would shorts take their money elsewhere when they are making money on a consistent downtrend? The key when investing in one of these companies is to realize that each must have a catalyst of some sort to rid the shorts, and if that catalyst is not potentially present, then it could be a long and disappointing investment. Simply said, heavily shorted stocks can be the most frustrating stocks in the market to own and require a great deal of patience. 

Internet video streaming may be all the rage, but customers still flock to the ubiquitous red boxes that spit out DVDs. How long can Coinstar, the company behind RedBox DVD rentals and its namesake loose-change coin machines, survive on this old media medium? Longer than many may think, especially with its new expansion plans. The opportunity is ripe for Coinstar to grab market-share, but is it the right time for investors to grab its stock? To answer this question, you're invited to check out The Motley Fool's new comprehensive research report on the opportunities, risks, and must-watch areas in Coinstar's future. Simply click here now to claim your copy today.


Brian Nichols has no position in any stocks mentioned. The Motley Fool owns shares of Bio-Reference Laboratories. 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!

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