By Chris French, Guest Editor
We took a look at companies with high short interest that could get squeezed in the second quarter or suffer inevitable failure. Our thoughts on each are below.
Bridgepoint Education, Inc. (NYSE:BPI) is a service based company which offers associates, bachelors, masters, and doctoral degree programs in the areas of business, education, social sciences, psychology, and health sciences. The company operates two campuses, in Colorado and Iowa. Since the start of 2010, 1,150 courses and 60 degree programs with 125 specializations and concentrations have been offered. The company is headquartered in San Diego, California.
The float is 18.09M shares, of which 9.09M are short. As of February 28th, 2011, short interest was 46.60%. The market cap is currently 916.30M. Currently, BPI has no debt and 279.13M in cash. BPI is now one of the most heavily shorted stocks because new regulations from the administration’s education secretary Arne Duncan are dampening enrollment growth. These regulations include putting restrictions on incentive-based recruiting and taking legal action against schools which fail to advertise graduation placement rates accurately.
We think the impact on earnings over the long-run will be muted, however, and fears of permanent impairment to the for-profit education business are overblown. Short sellers have piled onto Bridgepoint and brought the share price to levels that discount most of the worst-case scenario for the for-profit education industry. We expect short covering throughout the year and into 2012, giving the share price an upward bias.
China MediaExpress Holdings, Inc. (OTCPK:CCME) provides television advertising network services on inter-city express buses in China in the cities of Beijing, Shanghai, Guangzhou, Tianjin, Chongqing, along with nine provinces throughout the country. Since 2009, the company’s advertising network consisted of 16,000 express buses and 34,000 television displays. The company is headquartered in Fuzhou, the People’s Republic of China.
The company has no debt and 169.95M in cash. The float is 10.17M shares, of which 7.83M are short. As of February 28th, 2011, the short interest was 58.40%. CCME is currently a target of short sellers because the company received notification from NASDAQ that it will suspend the company’s common stock from trading effective April 12th, 2011. We think the shorts have this stock, and that the company is headed down.
Rubicon Technology, Inc. (NASDAQ:RBCN) is a manufacturer and seller of products used for blue laser diodes, radio frequency emitting circuits, light-emitting diodes and optoelectronics. Products are sold in the categories of core, as-cut, as-ground, and polished. The company also manufactures optical windows for use in LED’s and blue laser diodes in solid state lighting and electronics. RBCN is a provider of products for several manufactures in North America, Asia, and Europe. The company is based in Franklin Park, Illinois.
The company has no debt and 82.20M in cash. The market cap currently stands at 668.18M, with a float of 18.73M shares, of which 10.04M are short. As of February 28th, 2011, the short interest was 86.00%. RBCN is the target of short sellers because of an overall increase in pricing and drop in demand. Cree (NASDAQ:CREE), one of the largest companies in this sector, issued a revenue warning stating that this downfall is primarily due to aggressive pricing and a lack in demand.
We think the company's performance will rebound, however, due to the recent quake and tsunami disaster, as the Japanese market will demand additional supplies of diodes, optoelectronics, and high tech optics.
Power-One, Inc. (NASDAQ:PWER) is a manufacturer of power conversion and management solutions in the areas of renewable energy, communications, and many other high technology markets. Products include power supplies used in networking systems, data processors, industrial equipment, converters, and power systems used for back-up power by cellular communications systems and communcations networks. The company also produces renewable energy products which convert solar and wind energy for use in residential and commercial power grids, and in appliances. PWER distributes its products throughout North America, Europe, Asia, the Middle East, and Australia. The company is based in Camarillo, California.
The company currently has a float of 95.78M, of which 35.40M are short. As of February 28th, 2011, short interest was 41.60%. The market cap is currently 890.43M. Currently, PWER has 36.01M in debt and 227.91M in cash. PWER is a target of short sellers because of stiff competition, inventory concerns and news that Italy, the company’s largest revenue provider, is reviewing its solar policy and that it may decrease its feed in tariffs, solar, and other renewable energy sources. Implementation of grids remains heavily regulated by government assistance, which has caused the industry to lag in many countries.
We think the shorts are wrong for two reasons: Italy is backtracking on its plan to cut tariffs on renewable energy. Additionally, demand for solar energy products will be on the rise as more solar energy projects move forward in the U.S. and China. We think this will give the share price upward momentum.
Cadence Pharmaceuticals Inc. (CADX) specializes in commercializing hospital-focused products in the medical industry. The company offers in-licensing and development of these products. CADX holds rights to Ofirmev, a widely used pain management drug. The company was founded in 2004 and is based in San Diego, California.
CADX currently holds a debt of 28.68M and 134.14M in cash. The market cap currently stands at 596.75M, with a float of 35.05M shares, of which 14.30M are short. As of February 28th, 2011, the short interest was 82.00%. CADX is the target of short sellers in part because Ofirmev is the company's only marketed product and needs to gain acceptance and overcome competition in the analgesic market. The company will need to diversify in order to maintain its edge in the market. It might be a while before the stock swings upward until sales materialize.
Despite these concerns, we think the shorts are wrong as CADX is in a position to build a powerful hospital-based sales force and acquire more products and market share. With the acceptance of Ofirmev into the market, we think the stock is headed upward.
The McClatchy Company (NYSE:MNI) is a major newspaper publisher based out of Sacramento, California. Newspapers include The Kansas City Star, The Miami Herald, The Sacramento Bee, The Charlotte Observer, and many more. Since December of 2009, the company owned 29 markets, with 30 daily and 43 non-daily newspapers in production. The company also has marketshare with local websites, including 14.4% of Careerbuilder LLC and 33.3% of Homefinder, LLC. Other major websites include cars.com and apartments.com.
MNI currently holds a debt of 1.70B and 17.51M in cash. The market cap currently stands at 294.18M, with a float of 53.71M shares, of which 20.77M are short. As of February 28th, 2011, the short interest was 71.90%. MNI is a target for short sellers because the company's operational performance has been highly volatile. The company has traded at multiple price shares, which is an indication of this volatility, thus leading to short selling. The forward P/E is set at 15.04, indicating hesitation of high projected earnings.
Amid these concerns, however, MNI is entrenched in both print and online sources. We think the stock is headed higher because the company is well diversified in local online markets, and sites like Careerbuilder LLC will bring more shareholder value as the job market rebounds.
Blackboard Inc. (NASDAQ:BBBB) is an innovative provider of software and services in the education industry. The company offers a host of web-based platforms and portals for teaching and learning, including Blackboard Learn, Community Engagement Module, Content Management Module, and Outcomes Assessment Module. The company offers commerce management for colleges and universities, both on and off campus. BBBB serves nearly all entities of the educational community, including government and corporate clients, along with schools, colleges, universities, textbook publishers, and education-focused merchants. The company is headquartered in Washington D.C.
The float is 30.54M shares, of which 13.07M are short. As of February 28th, 2011, short interest was 43.70%. BBBB currently has a market cap of 1.27B and total debt of 162.33M and 70.31M in cash. The company is a target for short sellers because the company's revenue sources, primarily colleges and universities will be feeling the effects of the administration's regulations. These include putting restrictions on incentive-based recruiting along with taking legal action against schools which fail to advertise graduation placement rates accurately.
The shorts are wrong, however, as BBBB just announced a $100 Million share repurchase program. We think the stock is headed higher because this opportunistic investment shows that BBBB is making great strides to increase shareholder value.
Entropic Communications, Inc. (NASDAQ:ENTR) is a semiconductor company which focuses on the design, development, and marketing of solutions for connecting home entertainment systems. ENTR has a wide base of products related to home networking solutions, including direct broadcast satellite services and high-speed broadband access. The company's products are aimed to deliver streams of standard definition and high-definition television-quality video, along with games, movies, music, and photos. The company serves major telecommunications providers and cable operators, along with over-the-top service providers.
ENTR currently holds no debt and 146.38M in cash. The market cap currently stands at 678.31M, with a float of 83.26M shares, of which 27.29M are short. As of February 28th, 2011, the short interest was 48.70%. ENTR is a target for short sellers due to strong competition and large swings in share prices, from around $14 down to $9.
Despite these concerns, we think ENTR is undervalued compared against the industry in which it operates. The shorts are wrong on this one: With a PEG at 0.62 versus the industry average of 1.3, we think the stock is headed higher. Already we have seen this as the stock has jumped 5.01% over the last week.
Coinstar Inc. (CSTR) is a provider of automated solutions on the retail level, focusing primarily on self- service coin-counting machines and DVD kiosks. The company also specializes primarily in money transfer at 95,000 locations including supermarkets, drug stores, and financial institutions. As of December 2009, Coinstar operated 19,200 machines. The company is headquartered in Bellevue, Washington.
CSTR currently has a total debt of 390.18M and 71.29M in cash. The market cap currently stands at 1.45B, with a float of 29.79M shares, of which 11.73M are short. As of February 28th, 2011, the short interest was 49.30%. CSTR is a target for short sellers because its profits are deeply rooted in DVD kiosk sales. With competition from companies like Netflix (NASDAQ:NFLX) and Amazon (NASDAQ:AMZN), CSTR has experienced a lag in growth.
The shorts are wrong on this one: A P/E of 28 is reasonable only if the growth rate is high, and CSTR has experienced good growth and strong cash flows from its money transfer and Coinstar machine services. We think the stock is headed higher because of strategic cuts in certain product lines and bad credit debt, allowing the company to operate more efficiently and generate higher profits.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.