Why I am Shorting This Money-Losing Stock

Unless you have a world-class spam filter or have been hiding under a rock, you are aware of how intense competition is among online pharmacies.

Even when you look past the hundreds of viagra peddlers, mammoth drug distributors and retailers from Medco (NYSE:MHS) to Walgreen's (WAG) have staked out their turf on the 'net. As (Nasdaq:DSCM) has learned over its rocky history, taking market share from these giants is not an easy proposition.

So why has tiny pink-sheet online pharmacy (OTCQB:HEWA) shot up 100% this year? Beats me. At current levels HEWA commands an enterprise value of more than 10x revenues, compared to at 0.42 revenues and Walgreen's at 0.53. The balance sheet stinks, with no cash and about $1.3 million in debt. Operating results are equally poor — last quarter HEWA.PK booked $1.21M in revenues with a gross profit of around $500k, but it spent over $1.3M in Selling, General and Administrative expenses (SG&A).

It's worth noting that there are a few institutional investors involved but most of them appear to have obtained shares at much lower prices, either through privately-negotiated sales, conversion of debt, or on the open market, when shares were much lower. The most notable institutional investors, famed microcap hedge fund managers Austin Marxe and David Greenhouse, have trimmed their positions considerably.


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