3 Stocks That Have High Short Interest for a Reason

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I don’t write very often about shorting stocks, but believe me, I have before and I will again. Sometimes there are very compelling shorts out there. I have no compunction about shorting, I have shorted stocks in the past, and I will again.

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For me, however, I like my shorts to be clear cases where there’s a great chance they are going to fall substantially. I’ve made mistakes where the company is in real trouble, but keeps on stumbling forward like the “walkers” from The Walking Dead.

Sears Holding Corp (NASDAQ:SHLD) comes to mind.

The best opportunities are when research suggests fraud may be at play. Andrew Left at Citron Research comes to mind. He’s controversial, but he’s made some great calls on the fraud front. If you can find such a case, then short all you can.

Otherwise, businesses that seem destined to fail and are in financial trouble, such as running out of cash to pay debt service, are other great choices.

Here are three stocks that are among the most heavily shorted in the market. Let’s see if there are good reasons for this short interest, and if there’s still downside.

High Short Interest: TherapeuticsMD, Inc. (TXMD)

High Short Interest: TherapeuticsMD, Inc. (TXMD)TherapeuticsMD, Inc. (NYSEMKT:TXMD) has roughly 18 million shares in short interest, representing 15.8% of the float, as of April 15, according to the Wall Street Journal.

That TXMD trades at $6.74 per share and has a $1.1 billion market cap is extremely generous for a company that I think will fold before it achieves its biotech objectives.

TXMD stock has three advanced hormone therapy pharmaceutical products in Phase III clinical trials. Now, it’s entirely possible that TXMD stock will hit the jackpot, get FDA approval, and have three big-money drugs.

However, in the meantime, it struggles to stay afloat by selling pre-natal vitamins.

TherapeuticsMD lost $54 million in 2014, and now has $51.4 million of cash … because of an equity offering. Otherwise, it’d be toast. I think TXMD will be toast sooner rather than later, considering how quickly it burns cash. More downside here seems likely.

As with all stocks with heavy short interest, you may want to set a stop-loss.

High Short Interest: Cheniere Energy, Inc. (LNG)

CQH Cheniere Energy Partners LP (AMEX: CQP)Let’s move to a larger company, Cheniere Energy, Inc. (NYSEMKT:LNG).

This $18 billion company trades way up at $76. Currently, 15.7 million shares of LNG are sold short, representing 7% of the float.

Cheniere operates in the liquefied natural gas sector (hence the LNG stock symbol). It owns terminals where natural gas ends up, a pipeline connecting them, and it markets natural gas, as well.

One look at the financials tells you why so many shares are sold short, and I’m amazed the stock is still at $76.

LNG stock is losing money hand-over-fist. Year-over-year revenues are stagnant, expenses are increasing, the company has lost more than a billion dollars in the last two years, and free cash flow is negative by almost $3 billion.

With nearly $10 billion in debt and only $1.7 billion in cash and short-term investments on hand, I think the shorts are right.

High Short Interest: Synergy Resources Corporation (SYRG)

High Short Interest: Synergy Resources Corporation (SYRG)Synergy Resources Corporation (NYSEMKT:SYRG) is caught in the terrible situation of declining energy prices. It is an oil and natural gas producer with 57,000 acres in Colorado to exploit. The problem is that with energy prices depressed, developing those resources isn’t yielding as much revenue as needed to support the associated costs.

SYRG stock has never made much money. It only made $28.8 million in FY14, and only $9.6 million in FY13. (And in fairness, in that respect, it’s heading in the right direction.) The company raised capital in the past few months, boosting its cash from $47 million to $219 million, but it also increased debt from $77 million to $146 million.

Again, though, the problem is cash flow.

Free cash flow was -$81 million in FY14, and -$48 million in FY13. So unless SYRG stock raises more capital in the next two years, it will be cash-poor again.

It’s beholden to energy prices, and while they’re on the rebound, they’re still far off more recent highs.

There was a large jump in short interest, from 7.68 million shares to 8.98 million shares from March 31 to April 15, now representing 10% of the float. After a huge ramp up in prices from 2012 to 2014, I think it’s time to look at the downside.

Lawrence Meyers has no position in any security mentioned. This article is for informational purposes only and does not constitute an offer or solicitation to buy or sell shares or securities in any company mentioned. This article does not constitute investment advice. Do your own due diligence and confer with your financial advisor before buying or selling any security. The author has not received compensation, directly or indirectly, current or prospective, from any known issuer, underwriter, or dealer in conjunction with the writing of this article.

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