Much energy has been devoted in the last two weeks to analyzing the actions of shorts in Harmonic trading; especially since the last earnings call which reported promising profit and revenue trends. I think what has happened with the Harmonic trading range since the conf call is indeed due to short trading. I think the shorts were reacting (maybe over-reacting) to market rumors of Harmonic’s cash being locked up in auction rate securities, which due to market conditions related to the mortgage loan crisis are suddenly not as liquid as investors had thought.
Not knowing the full extent of the problem, shorts may have aggressively shorted the stock driving the price down when from the fundamentals reported in the conf. call you would have expected the share price to go up.
Now we know that of Harmonic's $275 million in cash, $26 million is suddenly not liquid. Although not good, this is not nearly as bad as the shorts may have thought. As liquidity returns to this position, shorts will unwind their positions and the Harmonic share price should respond favorably.
From the Harmonic 10Q…
As of March 28, 2008, we held approximately $26.7 million of auction rate securities, or ARSs, classified as short-term investments and we believe the fair value of these securities approximates par value at the balance sheet date. These ARSs, which are invested in preferred securities in closed end funds, all have a credit rating of AA+ or better and the issuers are paying interest at the maximum contractual rate. During the first quarter of 2008, the Company was able to sell $14.5 million of auction rate securities through successful auctions and redemptions. The remaining $26.7 million in ARSs held by the Company as of March 28, 2008 all had failed auctions in the first quarter of 2008. Based on current market conditions, we believe that it is likely that future auctions related to these securities will be unsuccessful in the near term. Unsuccessful auctions will result in our holding these securities beyond their next scheduled auction reset dates, thus limiting the short-term liquidity of these investments.
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