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Short-interest for shares on companies reflects bearish investors anticipating a further stock drop. Short-interest increased between 6% and 84% for 50 companies listed on the Nasdaq Exchange between October 31 and November 15 2011. The median increase in short interest for these companies was 23%. The complete listing may be found here.

The implication of the recent rally of 7.6% on the Nasdaq Composite Index implies losses for short-sellers. The Nasdaq composite index rose from 2,441.51 to 2,626.93. With the index at 2,335.83, up 12.5% on December 2, losses for short-sellers were higher.

Will the market rise further, forcing short-sellers to bid shares higher as positions are covered?

Five of these companies with a P/E of 14 or higher, a short interest increase of 10% or more, and which trade on an average volume above 1 million shares per day warrant further investigation.

#

Company

Short Nov. 15 '11

% Change

Close Dec 2 '11 ($)

1

Adobe Systems (NASDAQ:ADBE)

19.15M

32%

27.11

2

Melco Crown Ent. Ltd. (NASDAQ:MPEL)

7.52M

31%

10.03

3

Dell Inc. (NASDAQ:DELL)

65.63M

18%

15.70

4

Yahoo! Inc. (NASDAQ:YHOO)

36.53M

14%

16.05

5

Activision Blizzard (NASDAQ:ATVI)

18.83M

10%

12.27

1) Adobe Systems Incorporated

Sell.

Adobe trades at a P/E of around 14.8. The company recently made headlines when it decided to abandon updates to Flash player for mobile devices. This implies that Adobe is conceding to HTML5 as the standard. During an analyst day, the company said it expected 800,000 new users by 2015. The company’s core creative suite product grows well each time the product is refreshed, which partly justifies the high P/E.

Adobe has a high exposure to the creative market, which is sensitive to the health of the economy. With persistent concerns over Europe’s crisis, corporate customers will continue to restrain spending on upgrading Adobe products. This, along with Adobe’s limited positioning on the mobile space, will restrain any upside for Adobe shares.

2) Melco Crown Entertainment Ltd.

Buy.

Trading at an even higher P/E than Adobe at 26.4, Melco Crown Entertainment is up 80% from its 52-week low. Shares are up even with a 31% short interest increase. Howard Marks’ Oaktree owns 1.1M shares in the company. Casino listings like Las Vegas Sands (NYSE:LVS) are still holding their value, and Melco Crown is no exception.

3) Dell Inc.

Short-interest increased to 65,625,904 shares for Dell on November 15. Shares are just 10% below a 52-week high. Dell’s P/E is 8.1, slightly below that of Hewlett-Packard (NYSE:HPQ).

In the medium timeframe, share price will fluctuate with the health of the economy, resolution to Europe’s crisis, potential growth for ultrabooks, and the performance of Hewlett-Packard shares.

4) Yahoo! Inc.

Buy.

Short-interest increased for Yahoo shares by 14% to 36.5M shares despite the likelihood that the company will be taken over. The bearish bet on Yahoo stems from Yahoo’s desire to entertain a minority ownership over an outright sale.

The latest speculation is that Yahoo will be offered $20 a share, a 25% premium to its closing price.

Fundamentals are weak as reported in the company’s most recent quarterly earnings. However, Yahoo recently launched a much-needed refreshed Yahoo Finance, and is increasing the development of original content.

5) Activision Blizzard, Inc.

Buy.

Shares in Activision Blizzard plunged 14.79% from its 52-week high in recent weeks. Short interest increased to 18,826,043, or 10%. The company has a market capitalization of $14B. Shares were under selling pressure as insider sales increased, and the company spooked investors after seeing growth slow for World of Warcraft.

The most notable event for Activision shares will be the Zynga (NASDAQ:ZNGA) IPO this month. Zynga failed to cash in while the markets were receptive to risk, which would have netted a $20B market capitalization for Zynga. If Zynga raises $1B through the sale of shares at $8.50 to $10.00, Zynga’s IPO will be $10B. This implies Activision is worth just 28.6% more than Zynga.

Fundamentally, the implication of Zynga’s share price is that consumers are more likely to spend time and money on Facebook games than to buy console or downloadable Activision games. Zynga recently revealed a rapid deterioration in earnings. Zynga games simply lack long-term interest for consumers. Conversely, the Call of Duty franchise for Activision demonstrated sustainable long-term consumer interest. Each release results in $1B sales.

Finally, Activision’s digital gaming division is not recognized in its share price. The Zynga IPO will force the market to recognize Activision’s value, should investors be receptive to Zynga’s IPO.

Source: Trading 5 Nasdaq-Listed Companies With A Rising Tide Of Shorts