<% ' AvantGo:MarketClose %>DJIA 8371.97 +5.93 (+0.07%) S&P 500 1068.09 +2.75 (+0.26%) Nasdaq 1737.35 +19.72 (+1.15%) Value Line ndx 827.68 +0.01 unch 30-Year Bond 105 24/32 -16/32 5.12% Yield<% ' AvantGo:End %>
<% ' AvantGo:Heroes %>Massachusetts-based environmental consulting firm Fluor Daniel GTI <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: FDGT)") else Response.Write("(Nasdaq: FDGT)") end if %> rose $2 3/16 to $8 1/16 after agreeing to be acquired by facilities management and construction company IT Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ITX)") else Response.Write("(NYSE: ITX)") end if %> for $8.25 per share in cash, a nifty 40% premium to GTI's closing price of $5 7/8 per share yesterday. IT moved ahead $1 to $8 3/4 on the news, as its shareholders were likely pleased with an estimated $165 million jump in revenue from the deal, which is expected to add $0.20 per share to IT's fiscal 1999 earnings. Construction and engineering company Fluor Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FLR)") else Response.Write("(NYSE: FLR)") end if %>, whose Fluor Daniel subsidiary owns a 52% stake in GTI, said the sale of the unit won't hurt its earnings; investors seemed to agree, as Fluor's shares added $1/8 to $39 1/2. In a related (but not entirely unexpected) matter, IT also became Fluor Daniel's environmental services "contractor of choice" for the next four years.
HealthSouth Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HRC)") else Response.Write("(NYSE: HRC)") end if %> continued to swell (in a healthy way) today, climbing $1 3/4 to close at $12 5/8. The outpatient surgery and rehabilitative healthcare services provider moved up 14% yesterday after posting Q3 operating EPS of $0.28, up 17% from a year ago and in line with estimates. Further endearing it to investors was HealthSouth's plan to discontinue its home health operations beginning Nov. 1 as the company narrows its focus to its "core" surgery and rehab businesses. That HealthSouth would move away from the home healthcare area is not surprising, considering that changes in Medicare's patient formula for those services are scheduled to take effect soon. Fellow healthcare provider Columbia/HCA <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: COL)") else Response.Write("(NYSE: COL)") end if %> got $28 million for parts of its home healthcare operations in June as part of its bid to also become a "more focused" provider. Columbia finished the day up $13/16 at $19.
QUICK TAKES: Online bookseller Amazon.com <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AMZN)") else Response.Write("(Nasdaq: AMZN)") end if %> finished the day up $3/4 at $117 1/16 in anticipation of its Q3 earnings report. After the bell, the company reported a pro forma operating loss of $0.49 per share versus a $0.21 per share loss last year, which was not quite as bad as the First Call mean estimate of a $0.57 per share loss... Hard disk drive maker Maxtor Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MXTR)") else Response.Write("(Nasdaq: MXTR)") end if %> jumped up $1 9/32 to $10 11/32 after reporting Q3 EPS of $0.08, beating the Street's estimates by $0.03. CEO Mike Cannon said inventories in the channel and industry-wide pricing pressures both appeared to ease late in the quarter... Another disk drive maker, Quantum Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: QNTM)") else Response.Write("(Nasdaq: QNTM)") end if %>, added $3/8 to $16 5/8 as the firm agreed to cancel a joint venture with Matsushita-Kotobuki Electronics Industries for the development and fabrication of hard disk drive recording heads. Quantum CEO Michael Brown cited the venture's "unsustainable" losses as the rationale behind the decision.
CAD/CAM software developer Unigraphics Solutions <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: UGS)") else Response.Write("(NYSE: UGS)") end if %> moved up $1 15/16 to $9 1/16 after it said Dell Computer <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DELL)") else Response.Write("(NYSE: DELL)") end if %> will offer Unigraphics' Solid Edge CAD software as an order-ready option on its Precision WorkStations... Spartan Motors <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SPAR)") else Response.Write("(Nasdaq: SPAR)") end if %>, which makes chassis for heavy-duty vehicles, drove up $1 1/2 to $6 7/8 after reporting third quarter earnings of $0.16 per share, ahead of the $0.06 per share expected by the sole analyst surveyed by Zacks... Test, measurement, and industrial automation software developer National Instruments <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NATI)") else Response.Write("(Nasdaq: NATI)") end if %> jumped $3 3/8 to $27 7/8 after reporting Q3 EPS of $0.27 (excluding charges), beating last year's figure by $0.02 and analysts' estimates by a penny.
Immunological vaccine developer Corixa Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CRXA)") else Response.Write("(Nasdaq: CRXA)") end if %> shot up $3/4 to $5 1/16 after announcing an expanded strategic partnership with SmithKline Beecham PLC's <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SBH)") else Response.Write("(NYSE: SBH)") end if %> vaccine division, which will give Corixa $49 million in funding over the next four years... Fertilizer maker Agrium Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AGU)") else Response.Write("(NYSE: AGU)") end if %> grew $1 7/16 to $10 5/8 after saying the soil depletion that follows high crop yields means that the company "expects to sell all it can produce" through the spring of calendar 1999. Agrium's Q3 EPS of $0.15, which was even with the Street's expectations, topped last year's harvest by $0.02... Programmable logic chip maker Actel Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ACTL)") else Response.Write("(Nasdaq: ACTL)") end if %> acted up today, rising $1 15/16 to $12 7/16 after reporting Q3 EPS of $0.18, even with last's year's figure but $0.02 above the Street's projections.
Cable systems and set-top boxes provider General Instrument <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GIC)") else Response.Write("(NYSE: GIC)") end if %> ran up $1 13/16 to $25 7/8 after its Q3 EPS of $0.22 beat analysts' projections by a penny and last year's figures by $0.05... Media Arts Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ARTS)") else Response.Write("(Nasdaq: ARTS)") end if %>, the retailer of lithographs and reproductions of artist Thomas Kinkade, "Painter of Light," glowed today, rising $2 1/2 to $11 3/4 after reporting Q2 EPS of $0.31, beating the Street's estimates by $0.02 and outshining last year's $0.25 (after gain)... Cigar distributor Holt's Cigar Holdings <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: HOLT)") else Response.Write("(Nasdaq: HOLT)") end if %> smoked up $2 1/16 to $6 15/16 after Prudential Securities upgraded the company to "strong buy" from "hold"... Physician practice management firm PhyCor <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PHYC)") else Response.Write("(Nasdaq: PHYC)") end if %> flew up $1 3/32 to $6 1/2 after it turned in EPS of $0.15 (before charges), which was in line with expectations.
Home healthcare medical products manufacturer Sunrise Medical <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SMD)") else Response.Write("(NYSE: SMD)") end if %> blazed ahead $1 5/16 to $11 after reporting fiscal Q1 EPS of $0.16, $0.12 higher than last year (including re-engineering expenses) and $0.02 better than market projections... Satellite-based telecommunications network operator Iridium World Communications <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: IRIDF)") else Response.Write("(Nasdaq: IRIDF)") end if %> shot up $1 15/16 to $44 3/16 after saying it is on target for a planned Nov. 1 launch of commercial service. The firm reported a Q3 loss of $2.59 per share, which was not quite as bad as the $2.64 per share loss expected by the Street.
Newspaper publisher Knight-Ridder <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: KRI)") else Response.Write("(NYSE: KRI)") end if %> ran off a gain of $1 1/16 to $46 3/4 after announcing plans to buy back 3 million common shares, adding to its 400,000 share repurchase plan announced earlier this week... Medical and surgical products distributor Owens & Minor <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: OMI)") else Response.Write("(NYSE: OMI)") end if %> advanced $7/8 to $15 9/16 after announcing an eight-year exclusive distribution agreement with hospital operator Tenet Healthcare <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: THC)") else Response.Write("(NYSE: THC)") end if %>, which is worth an estimated $2 billion over the life of the deal.
Earnings Movers
Amvescap PLC <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AVZ)") else Response.Write("(NYSE: AVZ)") end if %> up $2 3/16 to $33; Q3 EPS: $0.48 vs. $0.45 last year; Estimate: $0.44
Jenny Craig Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: JC)") else Response.Write("(NYSE: JC)") end if %> up $1/4 to $5 3/4; fiscal Q1 EPS: $0.12 vs. $0.22 loss last year; Estimate: $0.11
MasTec Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MTZ)") else Response.Write("(NYSE: MTZ)") end if %> up $2 3/8 to $23 7/16; Q3 EPS: $0.48 vs. $0.31 last year; Estimate: $0.44
Synopsys Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SNPS)") else Response.Write("(Nasdaq: SNPS)") end if %> up $2 7/8 to $41; Q4 EPS $0.58 (excluding charges) vs. $0.42 last year; Estimate: 0.42
Western Wireless Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: WWCA)") else Response.Write("(Nasdaq: WWCA)") end if %> up $11/16 to $20 3/16; Q3 EPS: $0.65 loss vs. $0.95 loss last year; Estimate: $0.71 loss<% ' AvantGo:End %>
<% ' AvantGo:Goats %>Investment banking and securities brokerage firm Interstate/Johnson Lane <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: IJL)") else Response.Write("(NYSE: IJL)") end if %> announced it has agreed to be acquired by interstate bank holding company Wachovia Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WB)") else Response.Write("(NYSE: WB)") end if %> for about $230 million, or $32 a share in stock. That's actually $5, or 13.5%, less than Interstate/Johnson Lane's closing price yesterday, though it represents a premium of more than 20% to the average IJL closing price over the last 30 days. IJL dropped $6 7/16 to $30 9/16, below the proposed merger price. The brokerage will be folded into Wachovia through a new broker-dealer subsidiary called Wachovia Securities Inc., allowing the bank to start delivering full-service brokerage offerings and strengthen its capital markets position. At the same time, Wachovia's capital position and cash flow improves Interstate's standing in the investment management and underwriting business. Wachovia traded up $2 5/8 to $85 3/8. For more on the deal, see today's Fool Plate Special.
Car-rental company Budget Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BD)") else Response.Write("(NYSE: BD)") end if %> skidded for a $5 7/16 loss to $17 15/16 in heavy (trading) traffic despite topping analysts' expectations with third quarter earnings of $1.38 a share, up 39% from $0.99 in the same year-earlier period. Investors were less than impressed by the 52% increase in vehicle-rental revenue during the quarter, which pales in comparison to the year-to-date gain of 95%. While rivals Hertz <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HRZ)") else Response.Write("(NYSE: HRZ)") end if %> and Avis Rent A Car <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AVI)") else Response.Write("(NYSE: AVI)") end if %> raised rates this quarter, Budget maintained lower prices in an effort to grow market share. (Budget ranks as the third largest U.S. car-rental company behind Hertz and Avis.) Budget's total revenue was 63% higher than a year ago, but that still lags year-to-date growth of 98%. What's more, Q3 results got some help -- 1.3% of total operating revenue after tax -- from a cut in self-insurance reserves due to favorable insurance claims.
QUICK CUTS: Chemical and life sciences giant DuPont <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DD)") else Response.Write("(NYSE: DD)") end if %> was cut $2 11/16 to $56 7/8 after The Wall Street Journal's "Heard on the Street" column cited analysts as saying the company's outlook is "bleak" and its shares "overpriced" as the firm tries to remake itself into an agricultural biotechnology company... Long-distance carrier Sprint <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FON)") else Response.Write("(NYSE: FON)") end if %> was disconnected for a $1 13/16 loss to $74 3/4 as it put off a $604 million initial public offering of its Sprint PCS wireless venture due to the poor performance of other recent IPOs. Instead, the company is creating a separate class of shares for the business... Ameritrade Holding Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AMTD)") else Response.Write("(Nasdaq: AMTD)") end if %> traded down $3 7/8 to $16 after the discount broker reported fiscal Q4 EPS of $0.20, same as last year and below analysts' expectations of $0.23. The company spent $2 million more than last year on ads, so it's saying it achieved an "increase" in net income.
Online auctioneer eBay Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: EBAY)") else Response.Write("(Nasdaq: EBAY)") end if %> came down toward Earth today, falling $2 1/2 to $80 after reporting Q3 EPS of $0.05 (before charges) versus $0.01 in the same year-earlier period and analysts' predictions of $0.03... Telecommunications services company Intermedia Communications <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ICIX)") else Response.Write("(Nasdaq: ICIX)") end if %> sank $7 1/2 to $17 3/4 after reporting a wider-than-expected Q3 loss of $2.42 a share (before charges), compared with a loss of $1.62 a year ago. Analysts had predicted a per-share loss of $2.08... Allied Waste Industries <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AWIN)") else Response.Write("(Nasdaq: AWIN)") end if %> was trashed for a $1 7/8 loss to $20 5/8 after reporting Q3 EPS of $0.26, up from $0.20 a year ago and right in line with estimates... Air freight carrier and logistics services provider Kitty Hawk Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: KTTY)") else Response.Write("(Nasdaq: KTTY)") end if %> nose-dived $3 7/8, or 27.2%, to $10 3/8 after warning that its Q3 earnings will come in between $0.13 and $0.15 per share, lower than the $0.38 per share expected by the Street.
Network switching solutions company Tekelec <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TKLC)") else Response.Write("(Nasdaq: TKLC)") end if %> dropped $3 3/16 to $19 1/16 after reporting Q3 EPS of $0.18, up from $0.11 (before a gain) a year before and ahead of analysts' mean estimate of $0.15. Including the one-time tax benefit, the company earned $0.26 a share last year... Disposable latex and synthetic glove maker Safeskin Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SFSK)") else Response.Write("(Nasdaq: SFSK)") end if %> dropped $2 15/16 to $24 3/4 after saying that its collections have been "exceptionally high during October, considerably reducing our receivables balance"... Office products distributor United Stationers <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: USTR)") else Response.Write("(Nasdaq: USTR)") end if %> lost $3 3/4 to $23 3/4 after saying it had slower Q3 sales and started offering a lower-margin computer-supplies product... Contamination prevention products company Steris Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: STRL)") else Response.Write("(Nasdaq: STRL)") end if %> tumbled $2 3/8 to $21 1/8 after announcing fiscal Q2 EPS of $0.27, a nickel more than last year but even with analysts' projections. The company's 10.2% revenue growth for the quarter fell short of its annual goal.
Speech technology developer Lernout & Hauspie Speech Products <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: LHSPF)") else Response.Write("(Nasdaq: LHSPF)") end if %> dropped $6 11/16 to $38 9/16 on concern that a change in its accounting for acquisitions will hurt future earnings. The company reported Q3 EPS of $0.22 (before charges) versus $0.13 a year ago and estimates of $0.21... Internet services company Verio Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: VRIO)") else Response.Write("(Nasdaq: VRIO)") end if %> lost $4 3/16 to $13 7/8 after reporting a Q3 loss of $1.03 a share, worse than analysts' expectations of a loss of $0.70 per share. Deutsche Bank Securities cut its rating on Verio to "accumulate" from "buy"... Equipment and truck retail consolidator RDO Equipment Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: RDO)") else Response.Write("(NYSE: RDO)") end if %> shed $1 3/4 to $8 1/4 after saying it expects EPS for fiscal 2000 "to be near" fiscal 1999 EPS, which are anticipated to be about $0.90 a share (before charges). The Street was projecting EPS of $1.16 for 1999 and $1.44 for 2000.
National Car Rental, Alamo Rent A Car, and AutoNation USA parent Republic Industries <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: RII)") else Response.Write("(NYSE: RII)") end if %> dipped $1 to $15 1/8 in advance of reporting after the close Q3 EPS from continuing operations of $0.38, up from $0.28 last year and in line with estimates... Oil explorer and producer Snyder Oil Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SNY)") else Response.Write("(NYSE: SNY)") end if %> was clipped $1 7/16 to $15 3/4 after warning that Q3 results were hurt by higher-than-expected exploration expenses and lower-than-expected oil and gas production volumes due to hurricane-related shut-ins... Oil and gas exploration services company Compagnie Generale de Geophysique <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GGY)") else Response.Write("(NYSE: GGY)") end if %> slid $2 1/2 to $13 1/2 after reporting Q3 earnings of FrF 982 million (US$164 million), in line with last year's FrF 958 million (US$158 million). Revenues from its Land Seismic and General Geophysics division were lower, while equipment sales began showing signs of a slowdown.
Earnings Movers
Columbia Sportswear Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: COLM)") else Response.Write("(Nasdaq: COLM)") end if %> down $1 to $17 1/2; Q3 EPS: $0.90 vs. $0.85 last year; Estimate: $0.84
DSET Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: DSET)") else Response.Write("(Nasdaq: DSET)") end if %> down $1 7/8 to $12 1/4; Q3 EPS: $0.13 vs. $0.08 last year; Estimate: $0.10
Guitar Center Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: GTRC)") else Response.Write("(Nasdaq: GTRC)") end if %> down $2 9/32 to $18 23/32; Q3 EPS: $0.15 (pro forma) vs. $0.11 last year; Estimate: $0.15
Marcam Solutions <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MRCM)") else Response.Write("(Nasdaq: MRCM)") end if %> down $3/4 to $7 1/2; fiscal Q4 EPS: $0.29 loss vs. $1.12 loss last year (excluding charges)
Pittston Brink's Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PZB)") else Response.Write("(NYSE: PZB)") end if %> down $5 15/16 to $28 1/8; Q3 EPS: $0.51 vs. $0.50 last year; Estimate: $0.56
Platinum Software Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PSQL)") else Response.Write("(Nasdaq: PSQL)") end if %> down $13/16 to $9 3/16; fiscal Q1 EPS: $0.16 vs. $0.05 last year; Estimate: $0.16
Schlotzsky's Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: BUNZ)") else Response.Write("(Nasdaq: BUNZ)") end if %> down $1 1/8 to $9 5/8; Q3 EPS: $0.21 vs. $0.21 last year; Estimate: $0.24
Syntel Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SYNT)") else Response.Write("(Nasdaq: SYNT)") end if %> down $3 11/16 to $15 13/16; Q3 EPS: $0.16 vs. $0.07 last year; Estimate: $0.13
Trico Marine Services <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TMAR)") else Response.Write("(Nasdaq: TMAR)") end if %> down $11/16 to $7 1/16; Q3 EPS: $0.13 vs. $0.58 last year; Estimate: $0.17
VWR Scientific Products <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: VWRX)") else Response.Write("(Nasdaq: VWRX)") end if %> down $3 3/4 to $24 1/4; Q3 EPS: $0.40 (excluding charges) vs. $0.37 last year; Estimate: $0.42
West TeleServices Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: WTSC)") else Response.Write("(Nasdaq: WTSC)") end if %> down $1 1/2 to $12; Q3 EPS: $0.18 vs. $0.14 last year; Estimate: $0.18<% ' AvantGo:End %>
FOOL
ON THE HILL
An Investment Opinion
by
Louis Corrigan
A Short Course on Short Squeezes
<% ' AvantGo:FOTH %>Individual investors often think of a "short squeeze" as something like a summer romance -- intense, pleasurable, and a perfect elixir for what ails them. But what is a short squeeze really, and is it something you can enjoy without morning-after regrets?
Short-sellers typically make their money by betting that stock prices will fall. They do this by "shorting" a stock rather than "going long." That is, instead of buying a stock with the intention of selling it later at a higher price, the "short" sells first with the intention of buying the stock back later (or "covering") at a lower price. The short pulls off this perverse-sounding feat by initially selling stock that's been borrowed from someone else. Who would loan them stock? Well, you would. If you have your stock in a margin account, you've already agreed to let your broker loan it to short-sellers.
Your brokerage firm generates extra commissions by conducting transactions for the short-seller, by loaning the shares to another brokerage firm, or by pocketing interest income from the money generated by the short-seller's stock sale. In theory, you're none the worse off for having someone else trading your shares. After all, they'd just be sitting in your account otherwise. Whenever you want to sell the shares, your broker will manage to have them, even if that means telling the short-seller to return them.
Short-selling isn't for everyone, but the Motley Fool has consistently held that shorting is a viable investment option for experienced investors. The same grasp of fundamental analysis that makes someone a good long-term investor can be used to find overvalued stocks that are worth shorting. Of course, in going long, you risk no more than what you've invested up front. A short has potentially unlimited risk since the stock she shorts at $20 could end up becoming the next Microsoft. For most investors, short sales should constitute no more than 10% to 20% of a diversified portfolio. Also, short-sellers need to be more proactive in cutting losses when they're wrong about a company's fundamentals. Finally, a short-seller also needs to be attuned to market forces that can quickly turn even a dubious outfit destined for bankruptcy into a 300% gainer in the meantime.
The short squeeze is one such force. The essence of a squeeze is that brokers who have loaned out the stock are now requiring short-sellers to return the shares, meaning that the shorts must buy the stock themselves or risk a forced "buy-in" by the brokerage firm. Because brokerage firms aren't very picky about paying a good price on such occasions, the stock can spike dramatically, especially since market makers responsible for providing liquidity for a stock often see forced buy-ins as an opportunity to make a quick killing by temporarily raising their prices. Forced buy-ins may result from a trade going so much against a short-seller that he gets a margin call from the broker to either put up more cash or risk losing the position. Other times, it simply represents a change in short-term supply and demand exacerbated by increased trading volume and rapid turnover.
Let's say a heavily shorted company announces positive news that brings in new buyers. This demand pushes the stock higher, but it also leads some old holders to sell. The stock moves from one broker to another. Short-sellers who had borrowed shares from these old holders may have to cover the short position if their broker can't find new shares for them to borrow. This creates more demand, which pushes prices higher and continues the process. As you might expect, short squeezes often come in waves that attract momentum-oriented investors who see a stock rising and jump on for the ride. This additional demand, in turn, exacerbates the squeeze. Of course, these momentum investors usually jump ship quite rapidly when the momentum changes, adding to selling pressure later.
Conversely, there are also momentum shorts who jump on a sinking ship and then quickly cover their short positions when the momentum shifts. In recent weeks, many favorites of short-sellers -- including Think New Ideas <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: THNK)") else Response.Write("(Nasdaq: THNK)") end if %>, Quadramed <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: QMDC)") else Response.Write("(Nasdaq: QMDC)") end if %>, Coinmach <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: WDRY)") else Response.Write("(Nasdaq: WDRY)") end if %>, and Source Media <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SRCM)") else Response.Write("(Nasdaq: SRCM)") end if %> -- have seen short-covering rallies as momentum players close out short positions that proved profitable during the recent market meltdown. Such short-covering rallies can appear indistinguishable from short squeezes and can even trigger a short squeeze, yet they typically are motivated by profit taking after a stock has nose-dived.
Squeezes are most likely to occur with stocks susceptible to these supply/demand imbalances. Some numbers worth checking are: 1) the size of the "float" (the number of shares actively traded and not owned by insiders or investors with a greater than 5% stake in the firm) relative to the total number of shares outstanding; 2) the number of shares sold short relative to the float; and 3) the "short interest ratio," or the number of shares short versus the average daily trading volume (usually expressed as the minimum number of days required for all shorts to cover their positions).
A company with a hot story, a small float, and a relatively high short interest ratio (or a high percent of shares short relative to the float) is a prime candidate for a squeeze. Investors can find Market Guide data for a company's float and shares outstanding by using the snapshot feature at quote.fool.com. Short interest figures for Nasdaq stocks can be attained at ViWes InvestInfo. Also, every month the Wall Street Journal and Investors Business Daily publish short interest figures for Nasdaq and NYSE issues. Although there are no ironclad rules, a stock may become more susceptible to a squeeze when it has a short interest ratio of more than 10 and/or when 25% or more of the float has been shorted. Amazon.com <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AMZN)") else Response.Write("(Nasdaq: AMZN)") end if %>, K-tel <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: KTEL)") else Response.Write("(Nasdaq: KTEL)") end if %>, and Inktomi <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: INKT)") else Response.Write("(Nasdaq: INKT)") end if %> are three recent examples. (Companies with outstanding convertible preferred stock may have a high amount of relatively meaningless arbitrage-related short interest due to the preferred holders' establishment of short positions to hedge their investment risks.)
Online message board participants talk a lot about potential short squeezes. A squeeze may be seen as a way for a beaten down stock to find new life or for short-sellers to get what they deserve. Indeed, management at companies besieged by short-sellers will often attempt to orchestrate a squeeze by encouraging shareowners to "take delivery" of their stock certificates -- that is, to pull their shares out of a margin account from whence they may be borrowed and stick them into a cash account from which they can't be loaned. Optical Cable's <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: OCCF)") else Response.Write("(Nasdaq: OCCF)") end if %> Chair/CEO Robert Kopstein tried this a few years ago as did Chair/CEO John Rendall of the now bankrupt Solv-Ex (OTC Bulletin Board: SOLVQ). (Large institutional investors will themselves occasionally try to create a squeeze in a stock by taking delivery on their own shares.) Since the main way for a company to shake the shorts is to produce great sales and earnings, it's almost always a red flag when management starts attacking short-sellers or spending more than two seconds worrying about them.
Short squeezes are a mixed blessing for long investors. On the one hand, they can quickly send a stock soaring to unbelievable prices that otherwise might not be attained for years, if ever. Investors who keep their heads may find this an excellent opportunity to cash out. Yet those who get caught up in the frenzy can end up worse off. That's because just as the short-sellers created artificial supply earlier, a squeeze creates artificially souped-up demand that eventually dissipates.
Longtime Fools will recall Iomega's <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: IOM)") else Response.Write("(NYSE: IOM)") end if %> astonishing rise in the spring of 1996 and its sudden collapse. The rally was fueled by massive short covering, momentum players, and huge demand from online investors so captivated by the story that they margined their accounts to buy more shares. After Iomega increased the float by issuing shares in a follow-on stock offering, the squeeze subsided. Without the artificial demand and with new supply, the rally died. That sent momentum investors fleeing and left many online investors suddenly facing margin calls and forced liquidations as the bottom simply fell out.
Shares that have been shorted must ultimately be purchased. That's why some contrarily consider a high amount of short interest bullish. On the other hand, academic studies suggest that most heavily shorted stocks do eventually fall substantially. That's because huge short positions are usually the work of professional short-sellers, most of whom do a lot more due diligence than your average sell-side analyst. That's why it often seems like desperation when investors hope for a short squeeze. It's a bit like hoping for a takeover. If you've reached that frame of mind, you probably need to reevaluate the investment.<% ' AvantGo:End %>
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Contributing Writers Yi-Hsin Chang (TMF Puck), a Fool Brian Graney (TMF Panic), another Fool David Marino-Nachison (TMF Braden), a new Fool
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