Peeking at a world without short-sellers
Investors in Star Gas could've used a few naysayers
By Herb Greenberg
(Original publish date, October 20, 2004. Excerpted below. Full article available at CBS Marketwatch website.)
Everybody loves to hate short-sellers until their warnings turn out to be true. ...[N]o matter how many Enrons, Sunbeams or Lernout & Hauspies there may have been... investors appear to have selective memory. Or at least they think short-sellers are OK as long as they don't wind up snooping around any of their companies.
There's no better example [about what the world would be like if short-sellers disappeared] than Stamford, Conn.- based Star Gas Partners (SGU), which delivers heating oil and propane gas to homes. Until [mid-October 2004], it was one of those stocks individuals loved, with a dividend yield of around 10 percent. It had little in the way of institutional ownership, but was also off the radar of short-sellers....
[W]ith no short-sellers involved, there was nobody to alert reporters that maybe -- just maybe -- a company with a high dividend yield that attracted individuals looking for an alternative to puny money market payouts might be having problems.
Then came the company's second-quarter earnings report on July 29.... The company announced at the bottom of its earnings release that because of issues at its oil heating unit, which generates the bulk of revenues, it thought it would be "prudent not to declare" a distribution (or dividend) on its senior subordinated, junior subordinated and general partner units.
While the analysts did a good job downgrading the regular common stock, their message didn't get out because the stock was owned mostly by individuals.... That's evident by the relatively stable performance of the regular stock's shares.... The price... dropped just a few points as if this were no big deal.
Then, on Oct. 18, reality hit.... Star was forced to suspend dividend payments and warned that if its bankers don't help out it could be forced to find additional financing "on extremely disadvantageous terms." It also said that it could "even" be forced to file for bankruptcy....
It was a story any short-seller would've loved. But with none involved, one of the most likely sources to tip off the press didn't exist. What's worse, without short-sellers -- whose buying often acts as a cushion to soften the fall -- Star's stock plunged in a vacuum, losing more than three-fourths of its value in a single day.
...Can the shorts be wrong? Absolutely. But if the shorts are right, at least investors can't claim they weren't warned. After all, as Star proves, companies only tell you after the fact. |
