I NEED ONE MORE FAVOR, OR WHAT IS MY EXIT STRATEGY?
Early in May, when Iomega was trading at 55, there were nearly 20M short sales outstanding. Less than 9 months earlier, in October, 1995, Iomega was trading at 2.80 (split adjusted) and at 6.50 as late as January of this year. Short sellers had more than $1 billion dollars at stake. Some were looking toward bankruptcy.
Jaye Scholl reported in Barron’s on May 13, 1996:
"It was a very, very difficult period," confides Peter Thomas, who manages the $5.3 million Skye Short-Selling Fund in Lake Tahoe, Nev. "I was down 8% for the month, but many other short-sellers have double-digit losses. One guy is down 40%. Anyone who held the big short-interest stocks like Diana, Presstek, Iomega and U.S. Robotics, got killed. I think I'll prevail in the long run because, historically, I've made money in all markets. But this proves you can't wait for the market correction -- you've got to pick the right stocks."
In retrospect, the shorts were not going to take this lying down. They mounted a PR campaign. They told their story to anyone that would listen to them and who could repeat their story in the established financial print media. The first big payoff came May 27th in a Barron’s article titled "Market Mania" by Andrew Bary. The following is an excerpt from that article that concerned Iomega:
"One company that has almost defined the speculative fever is Iomega, whose shares have risen 100-fold in the past 18 months, capped by a quintupling in the past two months. Iomega clearly makes some hot products in its Zip and Jaz disk drives, which many stores can't keep on the shelves because of their popularity with PC users as back-up storage devices. "
"The bullish case for Iomega is that the Zip and Jaz replace floppy disks and eventually come with every new PC," says Michael Murphy, editor of the California Technology Stock Letter. Despite the advantages of the Zip over floppy disks in providing superior memory capacity, Murphy doubts the floppy is a goner. Two reasons: Zip disks are more expensive, and they offer more memory than many people need."
"After peaking Thursday at 55 1/8, Iomega shares tumbled to 44 9/16 by Friday's close, ahead 9 15/16 on the week. The excitement was caused by news that a Taiwanese PC maker, Acer, will include the Zip as part of its version of the much-ballyhooed $500 computers that will link users to the Internet. The knock against the cheap boxes had been that you couldn't download all the cool stuff on the `Net into your PC. But the Acer PC, featuring the Iomega drive, will offer the needed memory, making it, as one analyst put it, "a catcher's mitt for the Internet."
"There was, however, less to the announcement than met the eye because Acer's American unit said it wouldn't offer the new PCs in this country, since they run on an operating system that isn't favored by U.S. buyers. "
"The problem with Iomega is that its valuation, at about 120 times this year's profit, embodies a lot of hope, especially with the company facing competitive threats from Compaq and possibly International Business Machines. Looking at it another way, here's a company with a $6 billion market value that had less than $1 million in cash on hand at the end of March and a book value of about 50 cents a share. "
The most glaring problem I have with this article is that they refer to the Zip drive as a memory device and they go on to put forth the opinion that the Zip offer more memory than people need. How do you respond to this kind of arrogance or is it just plain deceit to confuse people. Iomega cannot offer more of something that they don’t produce. They produce storage devices. Intel (among others) produce memory devices. How could these people comment about an industry that they don’t (or pretend not to) understand and about a company whose products they don’t know or pretend not to understand.
The statement about the Acer announcement as being less than accurate and less than meets the eye is something else that is difficult to respond to (perhaps they understood that when they made the statement). The outcome of selling a $500 computer, with a Zip drive in each one, to markets in China, India, and the other emerging economic areas is difficult to determine. The potential, however, is anything but less than that would meet one’s eye.
In that same May 27th issue, Mr. Bary’s colleague Lauren R. Ruben had this to report:
"Iomega, one of the most chatted-up companies in cyberspace, also rose sharply on the week but, as noted, fell almost as sharply in the final sessions. Theories abound on just what cratered the high-flying issue, but one skeptic points to a "breakthrough" removable disk drive, developed by MKE of Japan, Compaq Computer and Minnesota Mining & Manufacturing, that reportedly will be included in future Compaq PCs. The product, said to be priced competitively with Iomega's 100-megabyte drive, in his view could become the new industry standard. "
No one informed Ms. Rubin that Iomega had a hand in developing that technology and had sold it because:
It was too expensive to manufacture.
It was too slow in performance.
It had no forward migration path.
To date, Iomega has sold over 2M Zip drives and there have been no sightings of the MKE/Compaq industry standard in any end-users hands.
Since May 27th, with the exception of the June 17th Issue, Mr. Bary and Ms. Rubin have taken turns spreading negative innuendo and linking Iomega to dubious issues and newsletters. Some examples follow:
June 3 - Lauren R. Rubin
"Some of the highest flyers, where valuations have become divorced from any rational appraisal of their prospects, came under pressure last week. Presstek fell 12 1/4 points, to 162 1/2; Diana lost 7 1/8, to 96 3/8, Optical Cable dropped 4, to 88, after hitting a midweek low of 57 following a skeptical discussion of the company in this space a week ago. Iomega, the hot disk-drive producer whose shares are up 100-fold in the past 18 months and which trade at 100 times 1996 earnings, lost 1/2-point, to 44 1/8, after recovering from a low Wednesday of 34 3/4."
June 10 Lauren R. Rubin
"Zip-drive maker Iomega shed 6 1/4, to 37 7/8, from Monday's open through Friday's close. Yet its Cabot affiliation alone can't explain the slide, which follows others that have toppled the stock from a May 23 high of 55 1/8. In January, when its shares were trading in the teens, Iomega, assisted by underwriters Hambrecht & Quist and Montgomery, tried and failed to price a secondary offering. Tuesday the company came back to market, this time with H&Q and J.P. Morgan on either arm, and offered five million shares at $35 apiece, a mere 6 15/64 points below the issue's Monday close. Why so steep a discount? ``That was the level at which we had strong institutional support for the offering,'' a Morgan source explains. "
"If the company itself was a willing and happy seller, existing holders, or at least those promulgating their views on the Internet, naturally put a positive spin on the seeming giveaway. ``They observed that discounted offerings happen `all the time', and that - good news - the company now has lots of cash,'' reports Eric Savitz, our resident Internet surfer."
June 24 - Laurin R. Rubin
"Then, there are special situations. A number of this year's shooting stars - Presstek, Iomega and America Online among them - were members in good standing of the Cabot Market Letter's model portfolio, which helped propel the shares, and the newsletter's hypothetical returns, into the stratosphere. "
July 1 - Laurin R. Rubin
"If the aforementioned four seem winners, Levinson also spots near-term ``challenges'' within the tech universe, including some old high-flyers. Iomega's on this list, along with Bay Networks, Hummingbird Communications, Intuit, Ascend Communications and Cerner."
July 8 - Laurin R. Rubin
"On online bulletin boards, investors swapped info about Comparator Systems, a tiny outfit that makes fingerprint ID products and was first listed on Nasdaq's lower tier in February 1990. In the Cabot Market Letter, the editor proclaimed that readers would have huge gains if they'd followed his advice in stocks like Presstek, a small New Hampshire printing company, and Iomega, the Zip-drive company whose stock ballooned to 55 in April from 5 in December. (It recently traded at 27.) Through May, reported the Investment Company Institute, investors had pumped some $32 billion into aggressive equity funds. "
WHAT IS YOUR EXIT STRATEGY? OR, HOW ABOUT ONE MORE FAVOR SO I CAN COVER MY SHORTS BEFORE IOMEGA ANNOUNCES ITS EARNINGS JULY 18TH.
In the July 15th issue distributed today, we find the following references to Iomega in an article written by Andrew Bary:
"Engemann is betting that Nifty Fifty stocks will shine as economically sensitive companies like banks and heavy manufacturers find it more difficult to produce strong profit gains. He also sees the Nifty Fifty benefiting as money rushes out of highflying growth stocks like Iomega, Sunglass Hut, Citrix Systems, Xylan and Corrections Corp. of America."
"McManus says investors shouldn't be surprised that the top technology companies, like Intel, Microsoft and Oracle, aren't far from their record highs, while such one-time favorites as Micron Technology and Cyrix are at a fraction of the peaks they hit last summer. Micron, the Iomega of the tech rally last summer, hit a low last week of 20 1/4, before ending at 21 3/8, less than one-quarter of its high of 95 last September. "
It is difficult to tell if either Engemann or McManus actually provided Iomega as an example of what they were talking about or if the writer just gratuitously threw Iomega into the story. Does it really matter why these two writers are helping the shorts? |
