Netflix (NFLX) has traded higher by 62% since announcing earnings, and 190% over the last six months. It wasn't too long ago that Netflix began its fall from over $300 to near $50 as investors feared an increase in contents costs, increased competition, and lower margins would lead to fundamental weakness. Yet throughout this process, Netflix has managed to continue growing its revenue and subscribers, and as a result, created massive short covering when it announced earnings late last week. As of January 15, 18.70% of its float was short, and it's when stocks have such a large presence of shorts that large gains are possible. Therefore, I am looking at three other stocks with a large presence of shorts that are growing fundamentally that could experience an abrupt reversal in stock performance.
SodaStream (SODA) might be the most similar to Netflix. It has a controversial business model (razor and blade), has underperformed growing fundamentals, and has seen a recent trade higher in the last few months. SodaStream has more than 55% of its float short as of January 15. Therefore, it presents the possibility of an even greater pop; which could occur with this upcoming earnings report if it's strong.
A couple days ago I covered SodaStream and explained that it was in a potentially company-changing scenario where it needs to post a very good earnings report to break into a new range. The stock is growing revenue by 34% and is more than doubling its earnings yet trades with a very conservative P/E ratio around 25.0. Last year, the company has grown in the Americas by a much more rapid rate than in Europe and has rolled its products into many new stores. Yet bears continue to believe its products are a fad, and have therefore placed large short bets against the stock. This earnings season, next month, could answer a lot of these questions, and lead to a stock that either goes greatly higher or significantly lower.
OpenTable (OPEN) follows almost the exact same pattern as both Netflix and SodaStream: It reached all-time highs in mid-2011, is now trading at a 50% discount, but has posted large gains in the last six months. The company offers a restaurant reservation service, and has very attractive margins for a company in this space. However, shorts have often argued that recent changes to the cloud and the need for innovation will weigh heavily on its margins. And at that point, OpenTable would no longer look like a good investment. In fact, Oppenheimer downgraded the stock on Wednesday for these reasons, and it's because of these concerns that 42.3% of its float is short!
On the other side of the trade, longs suggest that OpenTable is just now scratching the surface of its potential market and that any increase in costs will be short-lived. If OpenTable can prove that it can continue to grow its revenue while maintaining its margins then it can and will trade higher. However, the company must make a large impact in emerging markets to escape the shorts. Overall, it's a longer-term process and it doesn't look as though shorts are leaving anytime soon.
Over a period of five years, Spectrum Pharmaceuticals (SPPI) has returned gains of almost 400%. The stock looks to be one of the better long-term performers, but at the same time, has underperformed fundamentals and had almost 55% of its float short as of January 15. The company has three approved products: ZEVALIN, FUSILEV, and FOLOTYN, and about 10 candidates in its pipeline. The company has guided for revenue of more than $300 million for 2012 and an even better year in 2013. However the stock has lost about 20% of its value since January 2012. Those who are short insist that the company's lead drug FUSILEV is losing momentum to generics and will lose market share. When you combine this opinion with disappointing commercial sales from ZEVALIN there are many who are bearish. The bulls continue to point toward the company's track record of success and management's ability to create this company from basically nothing. There is promise in its pipeline, and if Spectrum is going to breakout and create short covering it has to prove three things: It needs to show a clinical benefit for several drugs in its pipeline; it needs to post a great quarter next month; and it needs to grow its current products in 2013. Like OpenTable, this is not an overnight success, but with a P/E ratio of 8.04 the stock is cheap and is poised to grow on any of these three catalysts.
Questcor Pharmaceuticals (QCOR) was one of the market's best momentum stocks of the last five years before a series of bad news hit its stock. The company has lost about 50% of its value since September after a bearish article from Citron Research, tightening coverage on its product Acthar Gel, and an investigation into the business practices of the company. As a result, this news forced investors to realize that this is a company that only has one marketed product, making it a very high risk. The market has therefore awarded Questcor with 49.08% of its float being short, which has increased greatly since September.
Since the bad news hit in September, Questcor has done everything possible to assure investors of its upside. The company has released good sales data; it has bought back shares; and implemented a dividend of 3%. Looking ahead, the company is going to have to prove that it's not behaving illegally when selling Acthar to physicians. It also needs to continue growing Acthar, a product that grew in sales by more than 100% last year. Finally, it needs to build on its most recent acquisition and create a valuable pipeline of drugs to ensure investors of its future. These things will not happen overnight; therefore Questcor will most likely remain undervalued for quite some time.
A high short interest or presence of short sellers can be difficult and frustrating for a long-term investor. It often leads to an underperforming stock, and this trend continues until a catalyst is formed that forces short sellers to change their position. All four of the stock mentioned have the potential to break free and trade higher, but could also trade lower. For a complete list of the most heavily shorted stocks you can find it here, and I urge investors to explore the reasons why a stock might be shorted and then determine if the risk is worth the reward.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in SODA over the next 72 hours.