Today's Lunchtime News featured an educational look at bids, asks, and spreads. Another educational feature today examines short selling and short covering, since there are a number of stocks that have gotten a lift lately from short covering.
You'll find all our Special Sections, FoolWires and earnings reports on either the Evening News or FoolWire screens. Enjoy!
Today:
COREL CORPORATION <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: COSFF)") else Response.Write("(Nasdaq: COSFF)") end if %>
after 6:00 p.m. EDT
(416) 626-4151 (passcode: 9464) -- replay
Discussing earnings report
ADOBE SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ADBE)") else Response.Write("(Nasdaq: ADBE)") end if %>
after 7:00 p.m. EDT
1-800-633-8284 (code: 1972478) -- replay
Discussing earnings report
Tomorrow:
GENZYME TISSUE REPAIR <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: GENZL)") else Response.Write("(Nasdaq: GENZL)") end if %>
after 7:00 p.m. EDT through 5:00 p.m. EDT on 10/4
(402) 220-6020 -- replay
Discussing new data from the Carticel Patient Outcomes Registry
SEITEL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SEI)") else Response.Write("(NYSE: SEI)") end if %> moved up $3 1/2 to $37 after announcing much higher third-quarter and nine-month revenues in comparison to last year's performance. The company sells its 3-D seismic modeling services to oil and gas explorers and drillers in exchange for stakes in those drilling projects. This is an interesting model in light of the fact that the seismic modeler would have great insight into the potential of a reservoir if the software is effective and analysts know what they're doing.
GENZYME TISSUE REPAIR <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: GENZL)") else Response.Write("(NASDAQ: GENZL)") end if %> rose $1 9/16 to $11 3/16, while new partner DIACRIN <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: DCRN)") else Response.Write("(NASDAQ: DCRN)") end if %> blasted forward by 10%, or $7/8, to $9 3/8. The two companies have formed a joint venture to further development of transplanting the brain cells of fetal pigs into humans with advanced-stage Parkinson's or Huntington's diseases. Finding cures for degenerative neurological disorders has been one of the foremost priorities in biotechnology. Thus, Genzyme Tissue, an investee of GENZYME CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: GENZ)") else Response.Write("(NASDAQ: GENZ)") end if %>, will provide 80% of the first $50 million in funding in exchange for 50% of the profits. After that, the joint venture partners will share in funding requirements. In exchange, Diacrin is bringing the majority of the intellectual capital to the table on this deal.
VALUJET AIRLINES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: VJET)") else Response.Write("(NASDAQ: VJET)") end if %> took wing and flew $2 9/16 to $12 13/16 today as news leaked that the Transportation Department will agree with the FAA and let the airline re-commence operations. The airline has been grounded since June 18, following the crash of its aircraft in the Everglades on May 11. There has been much discussion on whether the carrier will be able to assure flyers that the airline is safe and whether investors can hope for the same financial performance that the company turned in before the tragedy. Interested readers should head over to the Motley Fool's Airline Industry area for more on the subject.
QUICK TAKES: TRANSPORT HOLDINGS bounded forward $18 3/8 to $70 1/8 as CONSECO<% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CNC)") else Response.Write("(NYSE: CNC)") end if %> announced a definitive merger agreement. Conseco, for its part, advanced $2 5/8 to $49 1/8 on news that its debt rating may be upgraded... Power supply manufacturer ZYTEC <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: ZTEC)") else Response.Write("(NASDAQ: ZTEC)") end if %> jumped $3 to $13, canceling its secondary offering and noting that its third quarter earnings should be in-line with estimates... TOWER SEMICONDUCTOR <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: TSEMF)") else Response.Write("(NASDAQ: TSEMF)") end if %> jumped $1 1/4 to $7 7/8. The Israeli wafer foundry, a facility that makes semiconductors for companies without their own factories, is moving on widespread optimism regarding all sectors of the semiconductor industry.
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MENTOR GRAPHICS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: MENT)") else Response.Write("(NASDAQ: MENT)") end if %> lost almost a quarter of its value today, dropping $2 7/8 to $9 1/2 after warning investors of a single-digit decline in sales growth in the coming quarter. The company warned of difficult comparisons in the second quarter's earnings release, but that doesn't really explain why the stock has been in a slump for the majority of 1996. Such performance suggests that, whether they have invested in a "tech stock" or a staid, old steel company, individual investors should always do their own research in addition to just skimming through the public relations-oriented press releases of companies.
DIGITAL EQUIPMENT CORPORATION <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DEC)") else Response.Write("(NYSE: DEC)") end if %> slumped $3 1/4 to $36 5/8 on indications that another bad quarter is in the offing for the company, due to poor performance in its PC unit. Once one of those buy/hold/forget growth babies of an earlier go-go era, Digital has badly disappointed in the decade of the 1990s. When everyone thought the company finally understood the personal computer better and was making good on its turnaround promises, poor European performance and a sudden lack of vision in PCs have hindered DEC in 1996. Its bid to duplicate the type of restructuring engineered by fellow traveler IBM <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: IBM)") else Response.Write("(NYSE: IBM)") end if %> has still not blossomed fully.
ANHEUSER BUSCH <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BUD)") else Response.Write("(NYSE: BUD)") end if %> fell $2 1/2 to $36 7/8 as a First Boston analyst downgraded the stock from "buy" to "hold" this morning. Price increases may hurt the King of Beers at the same time that consumer preferences are shifting. Tastes are changing, either to micro-brews, craft-brews, or to non-alcoholic beverages. Decreased attendance and lower customer spending at the company's Sea World and Six Flags Theme Parks will also slightly hurt the St. Louis company's performance this year. Oppenheimer & Co. cut the firm from "buy" to "market perform" yesterday.
QUICK CUTS: TCSI CORPORATION <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: TCSI)") else Response.Write("(NASDAQ: TCSI)") end if %> was pummeled for another 29%, down $4 1/2 to $11, after a horrible week of trading for the database software company. It probably should have fessed up about disappointing sales a little earlier, instead of letting the market mull over the rumors that drove it down in an information vacuum... Shares in PAN AM <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: PAA)") else Response.Write("(AMEX: PAA)") end if %> hit a slight airpocket today, dropping $2 1/4 to $14 1/8. The resurrected airline conducted its first day of commercial operations, five years after going bankrupt... ROSS TECHNOLOGY <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: RTEC)") else Response.Write("(NASDAQ: RTEC)") end if %> fell $1 1/8 to $7 following the company's earnings warning released this morning. The company said that its sales to SUN MICROSYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: SUNW)") else Response.Write("(NASDAQ: SUNW)") end if %> and its efforts to widen distribution were not going as planned.
FOOL ON
THE HILL
An Investment Opinion by Randy Befumo
(MF Templar)
The Long and the Short of It
Today saw a series of dramatic rises in a number of stocks which had been left for dead earlier in the year. The list almost reads like a Who's Who of down-and-out stocks over the past six months; online services franchise AMERICA ONLINE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AOL)") else Response.Write("(NYSE: AOL)") end if %> powered ahead $2 3/8 to $34 3/8, digital compression chip fabricator C-CUBE MICROSYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: CUBE)") else Response.Write("(NASDAQ: CUBE)") end if %> scaled $1 7/8 to $44 3/4, removable storage guru IOMEGA <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: IOMG)") else Response.Write("(NASDAQ: IOMG)") end if %> retreated $1 3/8 to $22 3/4 and connectivity equipment maker US ROBOTICS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: USRX)") else Response.Write("(NASDAQ: USRX)") end if %> jumped a whopping $7 1/8 to $73. What the heck is going on here? A number of media sources today gave two simple words of explanation -- "short squeeze."
What the heck is a short squeeze? What in heaven's name does it mean to be short? Described in detail in the Eleventh Step to Investing Foolishly (accessible in our Fool's School), short-sellers essentially borrow stock in a company from someone else and sell it. They do this because they later hope to buy back the same stock at a lower price, pocketing the difference between their sale price and their buyback price. However, such a practice is not without its risks -- one might in fact be forced to buy back the stock at a much higher price, eating the difference and ponying up the needed funds from one's own bank account.
A lot of attention has been focused on the practice of short-selling by hedge funds, investing partnerships and small brokerage firms over the past year, as they targeted a number of high-flying, popular stocks. Until the June drop in the market, many of these short-sellers were losing their shorts being on the wrong side of names like Iomega, America Online, US Robotics and C-Cube Microsystems. A number of stories appeared in various media outlets describing the difficulties many of the firms were facing, saying some were even being bankrupted in the manic April-to-May jump in the market.
However, short-selling as a general practice tends to get a bum rap because of its higher-profile practitioners. A recent BusinessWeek article on the subject held that the vast majority of short sales are actually done by large stock holders in an attempt to hedge their position. Company insiders with significant holdings, individual investors who want to postpone tax consequences for large gains (called "shorting against the box") or large investors who are afraid to sell thinly-traded stocks for fear of moving the market will often go short while holding the same amount of shares "long." The remainder of short sales are the product of arbitrage opportunities, where two companies might be merging in a stock-for-stock deal and there is a difference between the offered price and the company's current market price. Shorting can also be done to hedge convertible bonds, options, warrants, etc.
Today's rises in the stocks mentioned in the opening paragraph have been tied to the large amount of short interest that has built up in the companies' shares. Short interest is a measurement of what percentage of a company's shares have been shorted. Many sources report short interest as a percentage of the total stock outstanding, but at Fool HQ we actually think the more useful figure is the percentage of the "float" that is short. The float is the number of shares that are currently available for trading and not squirreled away by strategic partners, insiders or owners of large positions who are restricted from selling. From April to September of this year, US Robotics's short interest rose from 6.95% to 10.7% even as the stock price plummeted. Iomega, conversely, saw short interest decrease from 44% in April to 22% in September.
The reason why a large percentage of the float being short is such an interesting data point is because it can set up a short squeeze. As only shares that are held in margin accounts can be borrowed by a short-seller, there is only a finite supply. This has been made even more difficult in recent months, as more and more institutions are putting their stock in cash accounts to avoid having them borrowed by the short-sellers they despise. If a lot of the stock is held short and the person who the stock was borrowed from wants to sell, if the brokerage cannot find other stock to borrow, the short might actually be forced to buy back the shares, a process that is known as having your short "called."
The dreaded "short squeeze" happens when the price of a company is driven up by shorts "covering" (buying back stock to avoid further losses), causing others to cover after them. A short squeeze can start for a number of reasons: surprise good news; surprising hype that still generates a lot of interest; a lot of investors that the shorts are borrowing from suddenly sell, causing a wave of shares to be "called"; or a lot of investors might move from a margin to a cash account, also causing the shares to be called. Whether driven up initially by right or wrong information or because some shorts are forced to cover, this builds into a wave of covering as more and more investors hit their margin limits. Shorts can only owe so much before a brokerage will demand that they cover or put up more money. If they don't have the cash, they are forced to buy back in, potentially pushing another short over the edge.
Shorts aren't all bad, however. First off, shorts add liquidity to the market by being on the other side of the trade from someone who wants to buy the stock. Unless they are spreading lies or engaging in "naked" shorting, which is selling short stock that you have not borrowed in a blatant attempt to drive the price down, shorting is just another way to profit from the discrepancy between current market values and the intrinsic value of businesses. Many shorts are actually the first to discover total frauds like MediaVision or National Student Marketing. Although many are calling shorting "too dangerous" today, it can function as an excellent hedge against a general market downturn as well as presenting an opportunity to sharpen one's analytical skills on the other side of the equation. Although it tends to be a practice with a short-term horizon, one can profit from being the disowner of poor businesses as well as the owner of good businesses.