DJI: WSJ(7/11) WorldCom Stock: Too Cheap To Resist For Investors
(AP Dow Jones 07/10 23:00:13)
By Dan Morse and Carrick Mollenkamp in Atlanta and Gregory Zuckerman in New
York
IN RECENT DAYS, an unusual stock has captured the imagination of investors
looking to make a quick profit: WorldCom Inc.
Last week, for example, day trader Rongdong Lu bought 5,000 shares of the
telecommunications company at a mere 6.9 cents apiece. He sold his shares
two days later at 24 cents, for a net profit of $750 -- or more than 200%
after commissions.
"I guessed there would be a rebound," says Mr. Lu, a student at the
University of Alaska in Fairbanks. "Also, I prepared to lose all my money."
Remarkably, Mr. Lu has had plenty of company, not just among his day-trading
brethen who pick over the remains of stocks that plummet to pennies a share,
but among many Wall Street pros. Indeed, trading in WorldCom's stock has
soared on the Nasdaq Stock Market since the telecommunications company
disclosed improper accounting of $3.8 billion on June 25.
From the beginning of the year till that date, average trading volume was
105.7 million shares daily. In the seven trading days since then, average
volume has been a huge 639.5 million shares -- including a record-breaking
1.51 billion shares on July 1, the first day of trading following a
three-day halt. Although volume has slowed, yesterday it was a
heavier-than-normal 171.8 million shares, as the stock closed at 20 cents,
down a penny.
Many of those trading WorldCom's highly speculative shares have been small
investors, who can buy a large volume of shares on the cheap and then try to
sell if there's a nice bounce. Even with the huge surge in volume in recent
days, the average WorldCom trade has been 7,500 shares, says Laszlo Birinyi,
president of the Westport, Conn., stock-research firm that bears his name.
That suggests demand by individual investors, he notes.
Retail investors aren't the only bottom feeders. Market experts say a good
chunk of the WorldCom trades are coming from sophisticated Wall Street money
managers. "The trading is so heavy that there are some pros in there," says
Bruce Goldfarb, senior managing director at Georgeson Shareholder
Communications, a New York shareholder-analysis firm.
At the same time that Mr. Lu was buying, William Brookshire, an Atlanta
risk-arbitrage manager, also circled the waters. He bought 200,000 shares at
6.5 cents and began exiting from the stock as it traded from 22 cents to 26
cents.
"I just said, `Holy mackerel,' " Mr. Brookshire says when he saw the intense
trading last week.
Usually, day traders such as Mr. Lu and pros such as Mr. Brookshire rarely
intersect. Day traders flick in and out of stocks with the click of a mouse.
Most money managers usually hold for a longer term. In the case of WorldCom,
however, the trading has been so heavy and the stock has been so cheap that
some just couldn't resist.
WorldCom stock was fetching 83 cents a share when trading was halted early
on June 26, after just 15 million shares changed hands. When trading resumed
on Monday, July 1, more than 250 million shares changed hands within 15
minutes of the opening bell, and the stock plummeted to six cents by the end
of the day.
Among the traders fueling the heavy volume were some pros. These normally
savvy investors usually would avoid a stock like WorldCom with such poor
prospects. But some began buying to close out their "short" positions,
whereby they bet against the stock. When an investor sells a stock short, he
borrows the shares and sells them, hoping for a drop in the stock price.
Now, they were buying the stock back to cover their short positions.
By late morning, day traders were flooding the stock message board at
Yahoo's Web site with their thoughts on the situation. At 12:43 p.m. EDT, a
message lit up on the WorldCom board that resembled trading at the peak of
the dot-com boom: "Let it Ride . . . Vegas, baby, Vegas!!!"
Mr. Lu, the Alaskan day trader, studied the situation from his computer. At
2:23 p.m. EDT, he placed his order, spending all of $345 for the shares he
bought.
Across the country in Atlanta, Mr. Brookshire, the professional hedge-fund
manager, also had his eye on his computer. "I was looking at the volume,"
Mr. Brookshire says. Heavy volume combined with a sharp price decline
signaled to him a "climatic selloff" and a chance for a nice gain.
Mr. Brookshire noticed the same trading patterns on the day when Kmart Corp.
filed for bankruptcy protection in January. But he waited too long to buy.
The price rose and the volume settled down. This time, a few minutes after
Mr. Lu bought WorldCom, Mr. Brookshire pounced. He bought 200,000 shares at
6.5 cents on a lark, not for client accounts but for a fund in which he is
the largest investor. Including commissions, it cost him $14,000.
By the end of trading July 1, the 1.51 billion shares of WorldCom that
changed hands accounted for more than half of total Nasdaq trading.
On the next day, July 2, 820.5 million WorldCom shares were traded. In
Atlanta, day trader Michael Chueh sat at his computer at Bright Trading
Inc., a day-trading office, debating what to do as the afternoon ticked on.
He scooped up 1,000 WorldCom shares at 6.3 cents each. Why only $63 worth?
"I have seen many get hurt trying to pick the bottoms with Enron," explains
Mr. Chueh.
The next day, July 3, he sold his stake at prices ranging from 16 cents to
20.3 cents, nearly his investment. He was out of WorldCom's stock by lunch.
Others were also exiting from the stock on July 3. Mr. Lu, in Alaska, sold
all his shares, one chunk of 1,500, then another of 3,500.
Both the day traders and the pros appear to think that the run-up in the
stock has come to an end for now. By Friday, Mr. Brookshire had sold 150,000
shares at prices from 22 cents to 26 cents. Because he had bought 50,000
shares before the sharp decline, he about broke even. He now holds 100,000
shares, which he is considering selling by tomorrow, a move that would net
him a gain on all his recent WorldCom trades.
In the past two days, day traders have grown frustrated as the stock has
flat-lined. Many have taken to Internet message boards, posting their
"strong buy" recommendations on WorldCom and trying to get things fired up
out there. "FINANCING IS COMING. DON'T MISS OUT!!!!!!," cried out one,
urging readers: "BUY NOW!!!!!!!!!"
Mr. Brookshire points out that traders have to be nimble. Mr. Lu learned
that this week. On Tuesday, he bought 5,000 shares at 21.3 cents each, but
ended up selling them at 21 cents apiece.
"Not very good timing," he says.
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Journal Link: See a timeline of WorldCom's troubles this year, with links to
relevant articles, in the Online Journal at WSJ.com/JournalLinks.
(END) Dow Jones Newswires 11-07-02
0300GMT |
