Adeptus Health (NYSE:ADPT) is a fast growing emergency room operator, practically doubling its revenue and number of facilities every year since its inception. In the first 2 years as a public company ADPT stock went from $25 to $124 and became overpriced with P/2016E of 52 and P/S of 8. Some traders started to short the stock. In August and September 2015 healthcare and biotechnology sectors were sold off heavily. Adeptus Health was no exception. Share price went down to $50 and while institutional investors started to buy, retail investors continue to short the stock. According to the latest Wall Street Journal report, Adeptus Health is now the most heavily shorted stock relative to its float. It is very hard to justify such a massive short position from a fundamental point of view.
The heavy shorting for ADPT has been explained by Adeptus Health's high valuations, questionable business model, and insider selling. However, these explanations do not stand up to scrutiny. The recent sell-off brought a current forward-looking P/E to 14.8 and a price to sales ratio to 2.3, which look reasonable, keeping in mind the company's top and bottom line growth. Additionally, the business model is so straightforward and transparent that there is practically no room for fraudulent or "creative" accounting practices. If the company doubles its revenue every year, and if the net income and operating cash flow start to grow, it's hard to call their business model questionable. Another key fact is that Adeptus' major shareholder - Sterling Fund - is responsible for the majority of the insider selling. Some investors see insider selling as an indication of a lack of confidence in the company's perspective, but when it comes to Adeptus Health, that is hardly the case. Sterling Fund is a venture capital firm, and ADPT is one its 50 portfolio companies. For Sterling Fund, this is just a normal investment horizon. With its goal already accomplished, the fund only has to return the capital to its investors.
The following charts demonstrated this divergence between institutional buying and retail selling:
ADPT has roughly 15 million shares of Class A common stock (the rest of the float is Class B), around 13 million of those shares are held by long term institutional investors, and 2 million shares are in the hands of short term traders and are available to cover a 7 million short position. Institutional investors tend to hold their long position for years. They will happily lend their shares for shorting in exchange for fees but won't provide their holdings for covering those short positions. This is an extremely dangerous situation for short holders and will unavoidably result in a juicy short squeeze.
Disclosure: I am/we are long ADPT.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.