Ignore the Fiscal Cliff: 1 Bullish Idea From 4 Tech Stocks Under $6

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Between Nov. 30 and Dec. 14, short-selling volumes increased for a range of companies in various sectors. In the volatile pharmaceutical and biotech sector, companies like Amarin and Dendreon  experienced a 15% increase in short-selling.  In the technology sector, bearishness increased for OCZ Technology (NASDAQ: OCZ) and Sirius XM Radio (NASDAQ: SIRI) each by 9%. Investors were also more bearish on Brocade Communications (NASDAQ: BRCD).  In this article, four technology stocks with the highest increase in bearishness will be explored.

The increased bearishness in companies with risky fundamentals is not surprising: speculative trades tend to correct more sharply when market uncertainty increases as a whole. The “Fiscal Cliff” is making it difficult for companies to plan capital expenditures and investments beyond 1 or 2 quarters. Reduced activity makes it even harder for companies that are struggling when conditions are more favorable.

Short interest volumes on Nov. 30 and Dec. 14, along with their percent change are listed in the table below.

Table 1

<table> <tbody> <tr> <td> <p><strong>Company</strong></p> </td> <td> <p><strong>Dec. 14 2012</strong></p> </td> <td> <p><strong>Nov. 30 2012</strong></p> </td> <td> <p><strong>Avg. Vol</strong></p> </td> <td> <p><strong>% Change</strong></p> </td> </tr> <tr> <td> <p>OCZ TECHNOLOGY</p> </td> <td> <p>20,292,553</p> </td> <td> <p>18,564,689</p> </td> <td> <p>3,218,148</p> </td> <td> <p>9%</p> </td> </tr> <tr> <td> <p>SIRIUS XM RADIO</p> </td> <td> <p>370,368,894</p> </td> <td> <p>339,089,166</p> </td> <td> <p>76,216,420</p> </td> <td> <p>9%</p> </td> </tr> <tr> <td> <p>BROCADE COMM SYS</p> </td> <td> <p>21,217,310</p> </td> <td> <p>19,756,864</p> </td> <td> <p>4,383,108</p> </td> <td> <p>7%</p> </td> </tr> <tr> <td> <p>MICRON TECH</p> </td> <td> <p>53,088,292</p> </td> <td> <p>56,945,550</p> </td> <td> <p>23,452 ,613</p> </td> <td> <p>-7%</p> </td> </tr> <tr> <td> <p>GROUPON INC</p> </td> <td> <p>41,468,849</p> </td> <td> <p>46,217,659</p> </td> <td> <p>18,847,322</p> </td> <td> <p>-10%</p> </td> </tr> </tbody> </table>

(Data Source: Bloomberg)

Groupon, Inc.

When Groupon (NASDAQ: GRPN) was last reviewed, it was viewed as approaching a bottom. Shortly after that, short-selling declined by 10%. In the technology space for companies trading below $10, could there be upside for Brocade, OCZ, or Sirius XM Radio? Below is a stock performance chart for these companies:

 

<img src="/media/images/user_15008/ocz27122012_large.jpg" />

(Chart Source: Yahoo Finance)

OCZ Technology

Investors are waiting for a resolution in the uncertainty surrounding OCZ. The company has a market capitalization of just $136.65 million (using December 27’s closing price). OCZ said on Dec. 17 that its first quarter (fiscal year 2013) report will be restated. Fiscal year 2012 and certain quarters of fiscal 2012 will also be restated.

OCZ may not yet have established enterprise sales for SSD, but growth in this segment is assured. Micron (NASDAQ: MU), whose shares saw bearish bets decline, said in its last quarterly report that enterprise SSD sales were strong. By December 14, short-selling volume declined by 7% to 53 million shares.

The bearish bet against OCZ is far greater: the short float for OCZ is 28.65%, compared to 5.62% for Micron.

Sirius XM Radio 

Sirius XM Radio shares declined slightly from its 52-week high when it closed below $3 on Dec. 27. The short float is 10.56%, or 370 million shares. December auto sales could be weaker for 2012, which would hurt Sirius XM Radio. The company recently named James Meyer as its new interim CEO, replacing Mel Karmazin for the time-being.

Speculators attribute the Fiscal Cliff to the recent drop in shares. Yet fundamentally, revenue is growing, churn is well-managed, and competitors are being kept at bay.

Analysis:

Of the companies facing higher bearishness, Sirius XM Radio is a company investors should focus on. Despite reaching almost $3 before some light profit taking, Sirius appears capable of rewarding loyal shareholders. In its last quarter, Sirius said:

We grew net subscribers by 446,000 in the third quarter, a 34% increase in subscriber growth from last year's third quarter. Year-to-date, we have added nearly 1.5 million net new subscribers, 27% more subscribers than we added in the first 9 months of 2011.

When the company reports earnings in early-2013, the company could report surprisingly strong subscription additions. This could propel the stock even higher in 2013. 

Sirius could continue its subscriber growth momentum this coming quarter. The company has the right product, business model, and operational know-how to continue growing. Free cash flow (up 159% year-over-year) and earnings are both improving, thanks to a control in expenses. Most importantly, the company is focusing on customer satisfaction. By raising self-help customer care services, Sirius is delivering customer support at low costs. Expanding content in the area of sports, entertainment, and exclusive talk will also broaden the appeal to a wider audience.

Sirius set a goal of generating $700 million in free cash flow for the fiscal year. When it reports next quarter, chances are good that the company will meet or exceed this target.


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