UniPixel Inc (UNXL), Navistar International Corp (NAV): When Being ‘Short’ Backfires!

It Doesn’t Take Much to Reverse a Long-Term Shorted Stock

Up until last week, Navistar International Corp (NYSE:NAV) traded with a one-year loss of 42%. This is a stock that had seen an incredible downtrend since January 2011, and therefore had created a significant amount of short interest. Because after all, shorts want to invest in a stock that trades lower — that’s how they make money.

Last week, after announcing earnings, the stock saw gains of more than 40%. The company’s earnings were not that good; it beat on the bottom line but missed on the top line. However, the neat thing about high short interest — in this case 35.30% of its float — is that it doesn’t take a lot to create large upside. In this case it was the announcement of a new CEO. While I don’t believe in the long-term upside of this stock, investors must acknowledge that with it being so oversold that additional gains are possible.

When Shorts Cover it Often Creates a Multi-Day Rally

Navistar International Corp (NYSE:NAV)Another company that saw a similar reaction was Pandora Media Inc (NYSE:P). The company announced earnings after the market closed on Thursday and then popped 17.56%. Unlike Navistar International Corp (NYSE:NAV), Pandora’s earnings beat on both the top and bottom line, as the company saw strong performance in mobile.

As a result, these results forced shorts to cover, and there were a lot of them, almost 30% of the stock’s float. As you can see with Navistar, when shorts cover it can sometimes create a multi-day rally. Therefore, watch Pandora Media Inc (NYSE:P) this week, and don’t be surprised if it continues to trade higher.

A Look at Why Some Investors Prefer Short

Two weeks ago, another stock with large short interest — 30%% of its float — saw a massive pop after earnings and has continued to trade higher. This stock is Universal Display Corporation (NASDAQ:PANL). This is a stock where the short interest makes sense, and should give retail investors an idea of what shorts might seek in a good short candidate. The stock trades at 18.13 times sales and is a maker of technologies that are used in various smartphones. And with the decline of Apple Inc. (NASDAQ:AAPL), it has also seen a decline, until it announced earnings on Feb. 28. Personally, I wouldn’t touch the stock with its valuation so high, therefore despite gains, don’t expect shorts to leave anytime soon.

Finally, one of the more controversial stocks of the last four months has also created a very large short interest. UniPixel Inc (NASDAQ:UNXL) was a small $70 million company back in December, but is now valued at over $260 million. This large run-up has followed the company’s announced of a “multi-million dollar” deal with an unnamed PC vendor.

Typically, when stocks see rallies such as this it creates more short interest, and shorts have rapidly acquired almost 40% of its float. UniPixel Inc (NASDAQ:UNXL) is another case that makes sense. It’s a stock that has rallied over 300% due to speculation. However, up until this point, the short interest has backfired, and as a result, many of the shorts have been forced to cover, which indirectly pushes the stock even higher. The process of understanding such outcomes can actually benefit longs in trying to profit from the pessimism of shorts, but in this case, my belief is that shorts will soon get this one right.

Conclusion

In my book, Taking Charge With Value Investing (McGraw-Hill, 2013), I discuss unmeasured fundamentals to explain how investors can use these things to make better investment decisions and to capitalize on overly pessimistic behavior. One topic is identifying the difference between a justly short stock and one that is not. For example, stocks such as UniPixel Inc (NASDAQ:UNXL) and Universal Display Corporation (NASDAQ:PANL) are appropriately shorted, as most reasonable investors understand that it is simply a domino effect that is leading to such large gains. However, in the case of stocks such as Pandora Media Inc (NYSE:P) or even Navistar International Corp (NYSE:NAV), investors’ pessimistic long-term outlooks can often be beneficial and create large gains when a catalyst presents itself.

To better explain, I’ll conclude with Spectrum Pharmaceuticals, Inc. (NASDAQ:SPPI):This is a company that has seen multiple years of growth, has three FDA approved products, 10 drugs in its pipeline, a P/E ratio of 8, yet still has a short ratio of 33.30. The presence of shorts will keep the stock volatile (100% more volatile than the market), and will keep it from appropriately appreciating to reflect fundamental performance. But as we’ve seen in the past, eventually the overly pessimistic outlooks will create large and sudden gains. The key is patience, being able to remain calm and logical despite frustration, and you will then reap the benefits when being short backfires.

Brian Nichols is long SPPI. The Motley Fool recommends Universal Display Corporation (NASDAQ:PANL). The Motley Fool owns shares of Universal Display Corporation (NASDAQ:PANL).

Comments
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months. Our beta is only 1.2 (don't click this link if beating the market isn't important to you).

Lists

The 8 Best Foods for Gaining Weight

The 10 Most Expensive Colleges in the World

The 7 Most Memorable Ad Campaigns of All Time

The 7 Most Expensive High Schools in the World

The 10 Electric Vehicles with the Longest Range

The 10 Cities with the Worst Drivers in the World

The 10 Most Expensive Dresses Ever Created

10 Islands to Visit Before You Die

10 Famous Celebrities Who Needed Rehab

The 15 Countries with the Largest Oil Reserves

The 10 Most Overused Excuses in the World

The 5 Best iOS Apps You Can’t Get on Android

5 Companies Damaged By Social Media Blunders

The 10 Most Legendary Blues Songs

The 10 Most Lawless Places in the World

4 Reasons China is a Threat to the US

The 17 Most Sugary Drinks in the World

The 10 Most Ruthless Rulers in History

The 10 Greatest Generals in History

Top 8 Travel Destinations for 2015

The 10 Safest Dog Breeds for Children

The 10 Most Stolen Vehicles in the US

The 7 Most Expensive Celebrity Weddings

The 10 Best LoL Teams in the World

Top 10 Worst Marketing Campaigns Ever Produced

Top 5 Diets that Help You Lose Weight

The 10 Best Ways to Stay Awake

7 Artists That Switched Musical Genres

The 10 Most Expensive Cities to Live in New Jersey

The 10 Best High Schools in New York

The 10 Countries With the Least Gender Inequality

The 6 Biggest Musician-Manager Feuds

The 10 Countries with the Cheapest Gas Prices

The 7 Most Theatrical Bands of All Time

The 8 Worst Band Breakups of All Time

The 10 Most Important South American Leaders

The 7 Most Successful Casting Show Winners

The 10 Most Peaceful Countries in the World

5 Big Reasons Communism Failed

The 15 Most Famous Carl Icahn Quotes

10 Scary Animals that are Actually Harmless

The 8 Most Famous Singer-Actors in Entertainment

The 10 Longest Wars of All Time

The 13 Worst Looking Foods that Taste Great

The 6 Most Gruesome Injuries Suffered During a Sports Match

The 20 Biggest Contracts in MLB History

The 7 Worst Blown Calls in Sports History

7 Free Ways to Advertise Your Business Online

The 18 Best R&B Songs of the 90’s

The 10 Most Dangerous States to be a Cop

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!