So we all know about shorts by now, and the crazy effect they’ve had on the market lately. I’m still holding $GME with the rest of you apes and have been keeping my eye on other heavily shorted stocks for a while now, so I’d like to share with you my DD on one of them. I am not saying this will be the next $GME, I am not a financial advisor, and the following is only my amateur opinion. I just like the stock.
$RKT is the second most shorted stock right now and while it’s coming back to earth today, it had an amazing run yesterday (+78%) and is still up 15% from Monday’s close. The #1 shorted stock (55% of float) is $KMPH which had an 80% gain premarket and is currently sitting at 50%. I did not get in on either of those stocks, and they have moved up too much recently for me to mess with them. Which brings us to the #3 shorted stock (34% of float), $OTRK.
What is $OTRK?
$OTRK, Ontrak, Inc., operates as an artificial intelligence powered, virtualized outpatient healthcare treatment company that provides in-person or telehealth intervention services to health plans and other third-party payors. Its Ontrak PRE (Predict-Recommend-Engage) platform predicts people whose chronic disease will improve with behavior change, recommends care pathways that people are willing to follow, and engages people who aren’t getting the care they need. The company’s technology-enabled OnTrak program is designed to treat health plan members with unaddressed behavioral health conditions that cause or exacerbate chronic medical diseases, such as diabetes, hypertension, coronary artery disease, COPD, and congestive heart failure. The OnTrak integrates evidence-based psychosocial and medical interventions delivered in-person or via telehealth along with care coaching and in-market community care coordinators who address the social and environmental determinants of health. Ontrak is known for its proprietary methodology in understanding and engaging members who need treatment, as well as for quickly translating proven science into practice. The company was formerly known as Catasys, Inc. and changed its name to Ontrak, Inc. in July 2020. The company was founded in 2003 and is headquartered in Santa Monica, California.
Telemedicine is obviously huge right now, and it’s great that they have an in-person option as well. The pandemic has also increased the need for mental health and substance abuse treatment and their AI system should help keep costs down and improve over time. And I love their mission of stopping diseases before they start, therefore reducing one’s lifetime medical costs. Unfortunately this mission is in contradiction with some health care providers’ goal of maximizing short term profits (more on this later).
A similar company that you may have heard of is Livongo ($LVGO) which was just acquired Teladoc ($TDOC) at the end of last year. At the time, Livongo’s revenue was about 4x higher than Ontrak’s current revenue, and they had a lower EPS of -$0.26. And the deal valued Livomgo at $18.5 billion! Up to the merger, $TDOC and $LVGO were up 153% and 431% YTD, respectively.
TL,DR; They are an in-person and telemedicine B2B provider that uses AI to address behavioral health and substance abuse in order to prevent other, more serious conditions. They have a very high growth potential and are a prime target for acquisition.
Stats
Ontrak, Inc. is a small company. With a market cap of only $506M, they are unfortunately (fortunately?) too small for me to post about them on WallStreetBets. They have impressive financials, however, and have shown consistent improvement over the past 5 years. They just pre-released 2020 Q4 financials on March 1, and the full earnings report is scheduled for March 9. EPS of -$0.07 beat expectations of -$0.30. Revenue for the full year of 2020 was $82.8 million, representing a 136% increase from 2019 and a CAGR of 120% since 2017. They have also continued to show considerable improvement in all valuation, profitability, liquidity, and solvency ratios. Their balance sheet is strong too, as they are sitting on $86.91M in cash. And here are the other highlights from their March 1 press release:
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Record Quarterly Revenue of $29.3 million in Q4 2020, up 149% year over year and up 22% from Q3 2020
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Operating loss of $1.8 million in Q4 2020, a 74% improvement year over year
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Record Quarterly Adjusted EBITDA of $2.2 million in Q4 2020, achieving quarterly positive Adjusted EBITDA for the first time
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Full Year Revenue of $82.8 million, up 136% Year over Year
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2021 Outlook revenue of $100 Million
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Raised $44.9 million in Q4 2020, $41.4 million net of related fees, by completing a second offering of Non-Convertible Cumulative Perpetual Preferred Stock
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Acquired LifeDojo Inc. in Q4 2020 (https://www.businesswire.com/news/home/20201029005301/en/Ontrak-Acquires-Science-Backed-Behavior-Change-Platform-LifeDojo-Inc)
Why the drop?
$OTRK is currently down around 74% from its 52-week high of $99.89 reached on January 27, was downgraded by a few analysts yesterday, and so far four law firms have announced that they are “investigating” the recent drop. This all seems to come from the typical playbook of the shorts, and I expect more negative news to come. There was a catalyst, however I believe the shorts are hiding behind this and using it to induce an overreaction. It also wouldn’t surprise me if some of the top holders are involved so they can make a quick profit and increase their long position.
The catalyst was their announcement in their March 1 press release that they have lost their biggest customer, Aetna. From the release, Aetna is focused on “the lowest possible cost per medical visit, and not on clinical outcomes data or medical cost savings, which were meaningful and significant.” So as I mentioned earlier, this model conflicts with the goal of maximizing short term profits. This is huge news, as Aetna provides 64% of their revenue, but the contract doesn’t expire until June 26 and the company is hoping to rebound quickly. As the CEO mentions in the release, “We have a strategy in place to regain the Ontrak-A business and are currently in late stage discussions with other customers whose metrics align with our value proposition of an integrated approach to whole health that delivers an average ROI of 3.7, average cost savings of 40% to 50%, and durable clinical outcomes with exceptionally high program retention and member experience scores. Collectively, we have a market opportunity of over $30 billion.”
This news did cause Ontrak to adjust their estimated 2021 total revenue down to $100M from their previous estimate of $165M. This is a sizable decrease of 39%, however the stock is down almost twice that amount. $100M is also still an increase of 21% from 2020 revenue, and they project to return to 100% revenue growth in 2022.
TL,DR; The company just lost their biggest customer, and revenue estimates have fallen significantly. The market has overreacted, however, indicating investors believe more customers may leave as well. Company guidance seems to indicate the opposite and projected financials are still strong. Trading at a huge discount IMO.
The Short
As I said, Ontrak is a very small company. They are shorted 34% of float (4.76 short ratio), but that only represents 2.52M shares as their float is only at 7.2M. That’s lower than the total amount of WSB subscribers and only 3 shares per member of r/stocks! This could be a stock where our community actually does have some power. And while the shorts have succeeded in the past few days, there are currently only 250k shares available to borrow (https://iborrowdesk.com/report/OTRK).
One company involved in the shorting is Culper Research, who used to often short companies in tandem with our favorite, Citron Research. They tried shorting $OTRK last year but failed miserably, and it looks like they are at it again (https://twitter.com/CulperResearch/status/1366395871877877765). While there are some legitimate concerns, it’s hard to see any of them as a “death knell” as Culper puts it. Culper recently shorted (a stock that I can’t mention here due to market cap) which drove the stock price down over 35%, however that company has responded with an investigation of their own (we’ll see if anything actual comes out of it). Sure, shorts play an important role in the market, but Culper seems to be one of those really nasty companies that tries to push companies to bankruptcy with baseless claims that their targets are completely “worthless.” I can’t find any evidence yet, but there are rumors that Culper actually lobbied Aetna to terminate their contract with OnTrak. There are also rumors that OnTrak is still in talks to retain Aetna (please share if you have any info on this!).
Total shares outstanding is 17.54M. 28.3% of those shares are owned by institutions, the top holders being big names like ArrowMark, Credit Suisse, Blackrock, Vanguard, State Street, and our other favorite, Citadel. That number has grown significantly in the past few months as well (22.67%), and as we all know these guys don’t lose often. Even if the shorts cover their positions, and no squeeze is forced, these institutions should be increasing their positions now that it is trading at a discount to what they just recently paid.
57.4% of shares are held by insiders and even with the recent rise, there have been no sales by insiders in over a year. The vast majority of insider shares, however, are all owned by the CEO, Terren S. Peizer (just under 9.2M shares). This amount of control is a little concerning, and I honestly can’t tell if Mr. Peizer is a genius or a scam artist (if anyone has more info on him I would love to hear it). On the other hand, it does give him a lot of incentive to maximize the share price and he has no reason to sell right now.
TL,DR; Possible short squeeze, great long term outlook. High ownership by CEO and large institutions. Extremely low float means little volume needed to move the stock – could help with a squeeze, or be a trap, but just one subreddit or one whale could do a lot of damage here.
My Position
Shares continued to drop this morning and spent the day hovering between $26 and $28. It closed just over $26, and if it breaks downwards again tomorrow, my next target is around $20. Call volume is very bullish right now though and it looks extremely oversold. I really like the chances of a strong reversal here, so I opened a position of 140@26.95 today. Just one new customer could bring this back up to it previous ATH, and an acquisition could push it even higher.
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