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NEW YORK (
TheStreet) -- With an eerie quiet on the U.S. deals front, takeover premiums have been wiped from many companies in the M&A rumor mill. But for some highly-shorted companies, valuations may be at a point where takeover interest is more likely, making for a risky short even if fundamentals continue to deteriorate.
In a screen of heavily shorted stocks with low enterprise values relative to earnings before interest, taxes, depreciation and amortization, information provider
Data Explorers was able to identify 61 companies with a short interest over 10% and swooning valuations. Data Explorers screened around the world for highly shorted companies with low or falling valuations and a market cap above $1 billion.
"Companies which have seen a fall in their share prices in the last year implies profits for short sellers, yet their low valuations could make them a potential acquisition target. Should this happen, a short seller would be exposed to any takeover premium offered by bidders," wrote Data Explorers in a March 3 report.
Data Explorers arrived at over 60 names scattered across the world, however five stand out as battleground stocks either because of their valuation, short interest or previous M&A speculation.
Here's a look at
three shorted stocks that may be too cheap to sell, according to
For more on deal activity and trends, see
10 Companies Primed for a Post-Bankruptcy Comeback
5 Tough Sells in the Tech Sector
. For more on M&A bankers and pending deals, see why
2012 deals hinge on Goldman's idea of fairness
Veeco Instruments(VECO - Get Report)
As of Data Explorers' screen published earlier in March, light emitting diode
manufacturer Veeco Instruments has both a low enterprise value to EBITDA and a high short interest that can be a dangerous cocktail to shorts, especially if M&A rumors resurface.
The Plainview, N.Y.-based designer of LED and solar systems currently has a low enterprise-value-to-EBITDA ratio of 2.0 to go with a short interest that's over 35% of outstanding shares, making it the most shorted company among possible takeover targets highlighted by Data Explorers. Already, a near-40% 2012 surge in Veeco Instruments shares has likely been tough to bear for shorts.
Nevertheless, huge questions remain for the company's 2012 earnings, as it tries to curtail an over-40% share lull in the last 12 months.
Analysts polled by
Bloomberg give Veeco Instruments a price target of $27.40 a share, on an expected plummet in 2012 sales and profitability. Veeco is expected to see its sales fall by nearly 50% to $534 million, cutting profits by over two-thirds to $36.71 million, according to consensus analyst estimates.
Still, the company's falling stock value could spur an opportunistic private equity or strategic acquisition, according to previous analyst speculation.
In 2010, Citigroup analysts noted that
Toyko Electron could show interest in U.S. semiconductor leaders like
Applied Materials(AMAT), while it could also look at a LED specialist like Veeco or
After a wave of semiconductor M&A, including a multibillion-dollar acquisition of
Varian Semiconductor by Applied Materials, Veeco re-emerged as a takeover candidate. Exane analysts pointed to Veeco and European peer
Aixtron as possible takeover targets in the LED space, with
ASML Holdings(ASML) as potential acquirers.
Even without an M&A bid for Veeco, the company could continue a 2012 rally after falling roughly 50% in 2012. Oppenheimer technical analyst Carter Worth highlighted Veeco as a company that could benefit from a "bearish-to-bullish" reversal in sentiment in a Feb. 27 note.
Earlier in February, Veeco forecast earnings per share below analyst expectations, pushing shares down. Still, revenue expectations were within the range of analyst expectations. Prior to the muted guidance from management, Citigroup had highlighted that Veeco and Aixtron would issue 2012 earnings guidance "well below" estimates, citing more competition in Veeco's metal organic chemical vapor deposition systems from low-cost Asian manufacturers.
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