Excerpt from a Worth magazine article (July 1999 on Asensio)
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The vernal equinox approacheth. Asensio hasn't taken the plunge on a new target in half a year, and now it looks like he's diving into the deep end.
The prey is audacious: Network Solutions, the exclusive registrar of Internet-domain names and one of a handful of profitable Internet companies. NSOL receives $35 a year for registering each Web address, and business is booming. This is hardly a penny stock: It has a market capitalization of more than $3 billion. Asensio is intrigued by the fact that while the U.S. government has already announced that soon, very soon, NSOL's five-year-long monopoly will be terminated, this potentially fatal event has caused nary a downtick in the stock price. Even if NSOL continues to register names, Asensio reasons, wide-open competition will squeeze profit margins to near zilch. The trigger event will come in two weeks, when the nonprofit group called ICANN, whose job it is to open up competition, meets in Singapore.
Asensio flies one of his regular analysts, Bryan, up from D.C. to dive into the research. Bryan (no last name -- Bryan is a freelancer, and his work for Asensio is something his other employees don't need to know about) will stay at Casa Asensio and basically sleep, eat, and breathe NSOL until he and Asensio have assembled their arsenal. As they prepare the first research report, the hedge fund lays in a sizable short position.
Network Solutions stock rages on. It's now approaching $300, with an imminent split, and Asensio is growing indignant on several fronts. He is livid the day the stock rises 18 points, probably costing him a fortune. Early reports from the ICANN meeting in Singapore favor NSOL. "The events in Singapore have been misrepresented completely by the analysts!" Asensio fumes. "When in fact the resolutions were as negative to Network Solutions as we could have possibly imagined!"
Furthermore, the kid from Cuba is incensed that the free-market-based system he so adores could be so corrupted -- that not only is a $3 billion monopoly doled out as if it were some piddling NEA grant, but that it's also preserved over the years in the face of competitors who are ready, willing, and able to join in. Finally, Asensio is confounded by the way day traders seem able to ride Internet stocks up and down at will. He has never trod this ground before, and the volatility and perverse logic of these stocks can give any short trader palpitations. To cap it off, he doesn't even consider NSOL an Internet stock -- not like an America Online or a Yahoo -- but rather a soon-to-be-canceled government contractor. Short sellers have been repeatedly burned trying to apply logic to the Internet group, which defies trading based on valuation. Asensio has no idea if the bulls will react to his red alert.
On March 25, at 8 a.m., Asensio officially drops the bomb. Within minutes, the first reaction trickles onto the NSOL board on Yahoo. First, from an informed, disbelieving, and frightened investor: "Asensio on NSOL?!?!?!?" Later, the less clued-in chime in: "Arsenio [sic] & Co???? -- who are these jerkoffs?" Asensio's first release restates what is already public knowledge: that NSOL has no lock on future registry and that profit margins will diminish with competition. He goes on to accuse NSOL of misleading investors into thinking that this will not be the case, and using a favorite term, he labels the stock "grossly overvalued."
The fun of the previous day's stock split has been spoiled for investors, and the stock plummets, destined to drop from the post-split $140s to the $110s in just a few days. A horrified NSOL responds that same afternoon, accusing Asensio of unspecified inaccuracies -- something almost every one of his targets does. The company also follows form in maligning his motives, as he is an admitted short seller.
NSOL spokesman Christopher Clough offers a more specific rebuttal. "Asensio went through all of the risk factors that we clearly designated and tried to misconstrue and exaggerate them to support his short position," Clough says. "As an Internet stock, we've been subject to volatility, and that makes us a target. E*Trade recently noted us as one of the top ten stocks that's day traded. Asensio has the most effect in influencing day traders that are not as knowledgeable about the stock."
Over the next few weeks, the Orioles will edge Cuba, 3–2, in 11 innings, and day traders will toy with NSOL like a cat with a stunned mouse. The stock does 20-point runs in either direction in the course of ten minutes, with no news crossing the wires. On April 8, Asensio decides the market needs a little push. He puts out one release stating that a bullish report on NSOL by Prudential Securities is rife with dubious and misleading statements. (The Prudential report implies, for example, that Network Solutions holds more cards than the government and should be able to stall competition for another 12 months or so.) A second release states that NSOL is trying to extract a fee of $16 per registration from all new registrars entering the business in exchange for operating a shared registry service. Asensio claims that ICANN doesn't need NSOL at all and that the actual cost of this service might be less than two dollars. He further implies that NSOL's parent company, Science Applications International, is trying to improperly flex its political muscle and that all this bad karma -- greed and corruption -- might impel the government to terminate NSOL's contract even sooner than it had intended.
It's not clear what will happen. Asensio has raised some serious doubts about the company's future earnings. But the market perceives NSOL as an Internet play, and as for thinking about the future, well, that's why they're called day traders. To a short seller, potential losses are limitless, and unless the market comes around soon to Asensio's view on this company, his losses can become unsustainable. Years of triumphs (22; count 'em -- 22) can be negated in a few days. Network Solutions is letting the market do its responding for it, and the ploy seems to be working.
But the domain-name-registry competitors, including AOL, are about to be announced, and that will make the end of the monopoly very real indeed. The Justice Department chimes in with news of an ongoing antitrust probe. And on April 19 and 20, like a horrible fever finally breaking, NSOL plunges from $89 to $60. The stock rallies again, even crossing $100 in intraday trading. It falls again, back to the $60s, where it stabilizes, sort of. Even Asensio's staunchest boo-birds have to admit that NSOL is not the company they perceived it to be, and Prudential's price target of $188 -- issued just two weeks earlier -- seems a vestige of frenzied, foolish optimism, like an exercise bike that has become a clothes rack. |
