Investing in struggling stocks that are also heavily shorted can be an incredibly risky move. But if these types of stocks are able to turn things around and prove their doubters wrong, the upside can also be significant. It's not a suitable investment strategy for most investors, but if you have a high risk tolerance, there are three potential contrarian plays to consider.
Medical Properties Trust(NYSE: MPW), Beyond Meat (NASDAQ: BYND), and Plug Power (NASDAQ: PLUG) are three beaten-down stocks that many short-sellers are betting will continue to struggle. Below, I'll look at just how heavily shorted these stocks are, what has to happen for them to turn things around, and whether they are worth potentially investing in today.
Medical Properties Trust: 50% short interest
A real estate investment trust (REIT) can sometimes be an attractive investment for its recurring dividend income and stability. But a REIT is only as stable as its tenants. And Medical Properties Trust is a REIT which has had problems with key tenants in the past, including Steward Health, which filed for bankruptcy protection earlier this year.
The turbulence in Medical Properties' earnings has resulted in a disastrous performance for the stock, which is down a whopping 79% since 2021. And while the REIT has distanced itself from Steward Health and is relying on new tenants, short interest remains incredibly high at around 50% of the stock's float.
For Medical Properties to turn things around, it needs to prove that it can get back to generating positive earnings numbers and that its new tenants are much safer. The healthcare REIT has incurred a net loss for three consecutive quarters. It'll take time for Medical Properties to demonstrate it's a safer option for investors, and with the company cutting its dividend twice since last year, it won't be easy for many investors to trust this stock.
With interest rates potentially coming down further next year, I think there could be a contrarian play here as REITs may become more attractive investments amid lower rates. And with so much bearishness priced into its valuation, Medical Properties may not have to perform too well to impress the market these days. This is a highly risky stock, but there are reasons to consider taking a chance on it. The safe option, however, would be to wait at least a couple of quarters to see if Medical Properties is able to find some stability in its earnings.
Beyond Meat: 40% short interest
Another heavily shorted stock is Beyond Meat. The fake meat company hasn't been doing well for multiple reasons. Not only has demand been unimpressive, but its gross margins are also often negative, which makes it difficult to see a path to profitability for the business anytime soon. With short interest as high as 40%, investors clearly aren't believing the hype around Beyond Meat's plant-based foods. Since 2021, Beyond Meat has lost a staggering 95% of its value; it's nearly impossible for the stock to have performed worse since then.
In the trailing 12 months, Beyond Meat's net loss of $314.4 million is nearly as high as its revenue of $317.8 million. Unfortunately, there's no easy way to see a turnaround for Beyond Meat. It needs a plant-based product that is in high demand and for which it can charge a high enough price to significantly bolster its margins. And until that happens, it's difficult to even see a path for a turnaround.
This food stock may be too risky an investment, even for contrarian investors.
Plug Power: 29% short interest
Shares of Plug Power are also down more than 90% since 2021 as the hype surrounding hydrogen energy has crumbled drastically in recent years. The company has reported massive losses, which make Beyond Meat's numbers almost look decent. Over the past four quarters, Plug has incurred a net loss of nearly $1.5 billion on sales of $684.5 million. And like Beyond Meat, it regularly reports a negative gross margin, which is a huge red flag for investors. Short interest in Plug Power is just under 30%.
If you're a believer in hydrogen energy, you might be tempted to take a chance on Plug Power. But the risk is that the company may not be around even if hydrogen energy takes off and becomes the preferred power solution in the future. While Plug Power may boast about a leadership position in the hydrogen industry, that hasn't amounted to a strong financial position for the business, and that's what's arguably more important for investors.
Plug Power reported $285.2 million cash (including restricted cash) as of the end of June. And for a company that has burned through $422.5 million in just the past six months from its day-to-day operating activities, the problem is clear: The business needs to drastically slow its cash burn and cut expenses. Regardless of the potential in hydrogen, it'll be all for naught if Plug Power continues to accumulate these types of losses. That's why I think it may be the riskiest stock on this list, and the one which may have the hardest path to turning things around.
Without clear evidence of a significant improvement in its financials, this is a stock that you'll probably want to steer clear of.
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David Jagielski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Beyond Meat. The Motley Fool has a disclosure policy.
