To:David Peterson
From:Cool Hand Luke
It is unfortunate that the incredible short position in NWCM could not have been stated in the 10-k as an asset - because it is the stocks biggest short-term and current positive.
Let's take a "Cool Look" at the short situation.
1. Fundamentals:
The shorts have a very good spokesman in Paperheart. Everything he has stated represents the Short "wish list", including the strategy of frightening the uninitiated, in the fashion of, say, Michael Asensio. Unfortunately, his facts do not stand up.
- "Web Pal is going to be a $20 million write-off":
NWCM does not have $20 million in Web Pal. I doubt they have $5 million in Web Pal. If they have even this much in it, they are covered by the vendor contracts they "bought".
- "The blue chip receivables are too high, and uncollectable":
It is true, you cannot pressure your best vendors into paying you. But a "blue chip receivable" is money in the bank. Right now, this "money in the bank" is equal to all of 1997's revenues!
- "There is no R & D spending":
NWCM is not a software company. They are not a biotech company. Their stated purpose is not to reinvent the wheel, but to improve it a little, and sell it cheaper. None of the products in development is new technology. In my opinion, R&D spending is a serious liability, and the less a company needs to rely upon it the better. Let a 3Com, or US Robotics, or Aura do the cutting edge inventions - then NWCM can do what it does best - improve the product and sell it more cheaply.
-" There is minimal cash flow":
Cash is always the achilles heel of a company like this. For all of the criticism and frustration levelled at Harry Kurtzman, there should be - at least from NWCM shareholders - a little gratitude. Aura is NWCM's insurance policy against running out of cash. How many small cap, high tech stocks have an insurance policy? Harry's proclivity for doing Reg D's insures an adequate supply - and fortunately NWCM cannot do one for another 2 years. Will Harry continue to help NWCM with their cash flows? You bet. It is his biggest and best asset right now, until Aurasound, Auragen, and Daiwoo kick in. And what happens if NWCM cannot afford to pay Harry back? Aura writes it off as bad debt, NWCM takes it as deferred income. Turn to Chapter 2.
-"Inventory levels are high".
Yes. Inventory levels are high. High enough to hurt earnings the next quarter or two? Perhaps, if they stay this high and have to be written off. Revenues for 1Q 1999 are rumored to be at least a third higher than 1998. It is doubtful that inventory write-off will exceed increase in revenues. Worse case? Flat earnings, not bankruptcy.
-"The Khan's went bankrupt in an earlier incarnation".
So did Henry Ford.
2. Technicals:
Most of the Shorts are out just under the mid-teens. At present levels, they have a profit. If they, like Paperheart, are waiting for a disaster, I would suggest they remember the old saw about the difference between pigs and hogs.
Pretend, for a minute, that you are a short. You are paying 8% in margin interest for the privilege. You already have a 30% short term profit. But you need the company to go bankrupt to get a 50% or better return on your investment. Well, unfortunately, this is no Chromatics Color. If you think NWCM may take a year or two to get into serious trouble, you have already paid the House 20% for the wait. All NWCM has to do is maintain flat earnings, and not only do you not get the windfall, you see your existing profit levels eroding. And even with flat earnings, the stock will seek a 15 PE, which will wipe out your profit.
Then you start thinking about the longs. We pay the House nothing. We have years to wait. All the unexplored potential of the Company is working for us. We are in good company, and smart company. More than a dozen institutions (not including Dreyfus) are also long, and feel the same way about the time horizon. Most of us own the stock more or less where the Shorts sold it, so we are slightly under water. Did we sell at 17? No. Why not? Because that unexplored potential is higher. And then there's that wiley old Kurtzman, who owns 8 million shares of the stock, guns leveled at anyone who gets through that first line, the longs.
Recently, due to a confluence of delays, mutual fund controversies, and a sell off in the broad markets, the stock drops back to its lows.
Message to the Shorts? Don't look a gift horse in the mouth.
Stay Cool |
