I'm going to take a stab at this and say it is bad for the longs. My reasoning behind this is taken from the "damage control" email that ceocast sent out the next day after the lemondrop. Note that the short interest did expand to almost 30%. So my view is that there are still some shorts trying to borrow in size, and they are willing to pay a premium. - JT
here's the quote:
"This evidence, while anecdotal, is further supported by the fact that a trader was quoted in this morning’s New York Post as stating that he had made more than $8 million shorting the stock Tuesday, suggesting, if true, that he alone was short more than 2.5 million shares. Our source at a major brokerage firm indicated that it was charging 3% to borrow the shares, another indication that shares have been difficult to borrow in size."
here's the whole email:
Wednesday, June 07 2006
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SPECIAL MID-WEEK EDITION:
We normally do not issue mid-week updates, but given the volatility in one of our Special Situation stocks, and the number of inquiries we have fielded, we felt it appropriate. Just as in Bull markets, when long investors may get away with ill-conceived investments for a period of time before the market catches up to them, the converse can also be true in bear markets, or markets demonstrating significant weakness. Just as bulls get sloppy in their analysis, we believe short-sellers, who have targeted shares of Home Solutions (AMEX: HOM), a provider of recovery, restoration and rebuilding/remodeling services, are misguided in their views. The sellers have been unable to find weaknesses in the company’s business, but instead have attempted to discredit the company through a smear campaign filled with false and misleading information, much in the way they did with both eResearchTechnology (NASDAQ: ERES) and LendingTree (NASDAQ: TREE), two big winners we had significant investments in where short-sellers lost hundreds of millions of dollars.
We have highlighted the bull case here often, so instead we will focus on the arguments posted recently by an Internet blog. These surround the company’s relationship with American Renaissance Homes (ARH), a recently-created company to capitalize on opportunities surrounding the rebuilding of Louisiana, and in particular New Orleans. The relationship is expected to account for just 3% of HOM’s 2006 revenue, yet short-sellers are shining the light in this area as a way to expose the company for failing to disclose that it had committed to lend ARH up to $800,000 IF certain conditions were met.
What the blog didn’t tell you: The CEO of ARH stated that "ARH has received a significant number of contacts from customers interested in purchasing homes and expects to receive its first orders shortly." While HOM believes that the opportunities with this company will be significant in the future, and the backgrounds of its executives suggest that they could be, the controversy over whether HOM should have disclosed that it was a start-up company and that it had agreed to provide a small amount of working capital has taken more than $100 million off of the company’s market capitalization. We believe the reaction is unwarranted.
The blog also says that it will review the company’s auditors, Corbin & Company (“Corbin”), who were the audit firm for PW Stephens, HOM’s largest subsidiary at the time they acquired them. PW Stephens is based in California, where Corbin & Company is also located. Corbin has been the company’s accountants since January, 2003 when the company was doing less than $20 million annually in revenue. Recently, in a report from the Public Company Accounting Oversight Board (PCAOB), Corbin, which had 14 audit clients as of the April, 2006 report, “was cited for failure to perform and document adequate procedures to audit revenues on two audits (not Home Solutions), failure to perform and document adequate procedures to audit the provision for income taxes, intangible assets for impairment and failure to document an assessment of the effect of misstatements on the prior year financial statements.” In responding to the letter, Corbin noted that the “procedures performed were sufficient to support our audit opinion, but the documentation of those procedures were not adequate. We have since corrected these documentation matters.” We believe most of the areas in question likely did not apply to the audit it conducted of Home Solutions.
What the blog won’t tell you: We reviewed similar reports on Eisner LLP, Grant Thornton and 20 other significant accounting firms, and all of them have similar comments and issues raised by the PCAOB, which seeks to provide guidance to accounting firms on their auditing methods. Corbin audits other public companies, including those on the AMEX.
The blog also sought to diminish the credibility of the Sanders Morris Harris (SMH) analyst, who today raised its Rating on HOM to “Strong Buy” and suggested that its price target of $15.50 is achievable within 6 months as a result of “several factors (that) lead us to believe that our price target can be achieved within this shorter timeframe – they include not only expected strong operating results from HOM but also the potential from the upcoming hurricane season, a pleasant surprise out of modular home sales, and attractive acquisition candidates that could bolster the company’s resources.” Once again, the blog twisted the facts, claiming that the analyst did not state his reason for upgrading his view.
What the blog won’t tell you: Naturally, the blog tried to discredit the analyst’s report by stating that the company has paid fees to SMH, as if that is surprising since it is an investment bank. What they did not tell you is that as of March 31, 2006, SMH maintained investment banking relationships with 15 companies and only 2 were Rated “Strong Buy”; 2 of those companies that had banking relationships with the firm were also rated “Holds”. Clearly, the analyst believes that the company’s prospects are strong, as few of the firm’s clients merit “Strong Buy” ratings, regardless of the banking relationship.
What else won’t the blog tell you? On Tuesday, when the stock traded 26.2 million shares, two floor brokers who were at the post of the AMEX specialist trading the stock, independently estimated that more than 10 million shares were sold short in one day alone! This evidence, while anecdotal, is further supported by the fact that a trader was quoted in this morning’s New York Post as stating that he had made more than $8 million shorting the stock Tuesday, suggesting, if true, that he alone was short more than 2.5 million shares. Our source at a major brokerage firm indicated that it was charging 3% to borrow the shares, another indication that shares have been difficult to borrow in size. If this anecdotal information is correct, it likely means that the short interest, which will be published on June 19th, will be well above the 2.2 million (8%) reported as of mid-May.
The blog has published three negative updates in four days. One might question why, if it is so certain that the company’s business is bad, that it just doesn’t wait until HOM announces earnings to see the stock decline. We think this is for several reasons. The most significant is that we believe the company will report strong second quarter results. In addition, a hurricane or the expectation that one would occur in the areas that the company serves, could cause shares to rise dramatically, creating a potential short squeeze. It is Hurricane Season, which is expected to be active. Finally, the company is likely to be included in the Russell 2000 additions when the list is published at the end of next week, which could increase interest among fund managers.
The stock currently trades at just 13.7 times the mid-point of the company’s 2006 EPS guidance. If the company merely meets its targets, it would represent more than 100% growth. The company said that upside from acquisitions and potential hurricane activity is not included. We continue to believe that there is substantial upside in the stock from current levels.
A profile, description, or other mention of a company in the newsletter is neither an offer nor solicitation to buy or sell any securities mentioned. While we believe all sources of information to be factual and reliable, in no way do we represent or guarantee the accuracy thereof, nor the statements made herein. THE READER SHOULD VERIFY ALL CLAIMS AND DO ITS OWN DUE DILIGENCE BEFORE INVESTING IN ANY SECURITIES MENTIONED. This publication accepts compensation from companies that it features. This newsletter should not be regarded as an independent publication. Our editors may, from time to time, acquire positions in the companies that they cover. This could represent a conflict of interest. The CEOcast newsletter shall be under no obligation to inform readers about its trading activities. CEOcast's editors reserve the right to buy or sell shares in these companies at any time. The following companies, featured in this newsletter, have compensated CEOcast: Home Solutions, seven thousand five hundred dollars per month and twenty five thousand shares of stock for a six-month agreement; editors of CEOcast own approximately one million two hundred thousand shares of the company's stock.
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