Earlier this year, several short squeezes triggered by subreddit r/wallstreetbets wreaked havoc in the financial markets. Shares of struggling companies GameStop Corporation (GME) and AMC Entertainment Holdings (AMC), for example, skyrocketed in price, with retail investors betting against hedge funds. This trend is expected to continue because retail traders are expected to gain more influence over the market as sophisticated technology and zero-commission trading platforms gain prominence.
One objective of retail investors is to gain from betting on stocks that are being discussed on numerous social media platforms and might experience a short squeeze. However, while short squeezes can lead to eye-popping rallies in many stocks, those companies that have weak business models or other fundamental weaknesses should eventually see a pullback.
Short squeeze candidates Support.com Inc. (SPRT) and SCWorx Corp. (WORX) seem to have garnered significant attention lately in the ongoing retail trading frenzy. However, due to their weak financials and bleak growth prospects, these stocks are overvalued at their current price levels. Hence, we think they are best avoided now.
Support.com Inc. (SPRT)
SPRT offers customer and technical support solutions primarily through home-based employees in the United States. It provides outsourced customer support and cloud-based technology platforms to clients in verticals, such as media and communication, healthcare, retail, and technology. In addition, the company provides SUPERAntiSpyware software, malware protection, and removal software packages; Guided Paths, a step-by-step self-help tutorial; and service delivery management solutions for technical support services. Approximately 41% of SPRT’s floating shares have been sold short.
Last month, WeissLaw LLP started investigating possible breaches of fiduciary duty and other regulatory violations by the board of directors of SPRT in connection with the company's proposed merger with Greenidge Generation Holdings Inc.
SPRT’s total revenue declined 11.6% year-over-year to $8.51 million in the second quarter, ended June 30, 2021. Its operating loss came in at $849,000 over this period. The company reported a $799,000 net loss, while its loss per share amounted to $0.03.
In terms of its trailing-12-months Price/Sales, SPRT is currently trading at 14x, which is 219.4% higher than the 4.38x industry average. Also, in terms of trailing-12-twelve-months EV/sales, the stock is currently trading at 15.37x, which is 242% higher than the 4.49x industry average.
SPRT’s POWR ratings are consistent with this bleak outlook. The stock has an overall D rating, which translates to Sell in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
SPRT has rated an F grade for Value, and a D for Growth and Stability. Within the D-rated Software – Application industry, it is ranked #118 of 145 stocks.
To see additional POWR Ratings for Sentiment, Quality, and Momentum for SPRT, click here.
Click here to check out our Software Industry Report for 2021
SCWorx Corp. (WORX)
WORX provides software solutions for the administration of health care providers' core business applications. It offers information repair, normalization, interoperability services, and a big data analytics model that includes a web portal for displaying data warehouse information and reporting and analysis. Furthermore, the company sells COVID-19 quick test kits as well as personal protection equipment. Of the company’s total floating shares, approximately 16% have been sold short.
Last month, Kahn Swick & Foti, LLC started investigating whether some directors and executives of WORX violated their fiduciary obligations to its shareholders. This could negatively impact the stock’s price performance in the near term.
For the second quarter, ended June 30, 2021, WORX’s revenue declined 24.1% year-over-year to $1.10 billion. In addition, the company reported a $1.25 billion operating loss. Its net loss came in at $1.25 billion, while its loss per share amounted to $0.12 over this period.
Currently, WORX looks highly overvalued. In terms of trailing-12-months Price/Book, WORX’s 5.55x is 42.4% higher than the 3.90x industry average.
WORX’s poor prospects are also apparent in its POWR Ratings. The stock has an overall D rating, which equates to Sell in our proprietary rating system.
It also has an F grade for Stability, and a D for Value and Sentiment. WORX is ranked #131 of 145 stocks in the Software – Application industry.
Click here to see the additional POWR Ratings for WORX (Growth, Quality, and Momentum).
Click here to check out our Software Industry Report for 2021
SPRT shares were trading at $36.39 per share on Monday afternoon, up $10.06 (+38.21%). Year-to-date, SPRT has gained 1,554.09%, versus a 21.75% rise in the benchmark S&P 500 index during the same period.
About the Author: Pragya Pandey
Pragya is an equity research analyst and financial journalist with a passion for investing. In college she majored in finance and is currently pursuing the CFA program and is a Level II candidate.
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