I too bought ZANY--back in September-- based on my own opinions of the company and the potential of the stock as the holiday toy season approaches.
Don't know much about TJ or his pumps and dumps and don't care--stocks with fundamental merit and a good seasonal story to tell shouldn't need his intervention nor be much hurt by it.
And as for the quagmire the shorters might be creating if they keep shorting toy-related stocks, see story below.
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October 14, 1999
Losing Their Shorts
By Ian Mount
4KIDS ENTERTAINMENT
*Stock split
Data as of 9/15/99
Sources: Nasdaq & ViWes Web Services
AH, ANOTHER article about the Pokemon frenzy.
Maybe we in the media seem fixated on Pokemon simply because we are deeply ignorant of the phenomenon. Or maybe we're just justifiably baffled. Either way, a good number of investors seem equally perplexed -- and equally unwilling to ignore the craze. And as investors, they're eager to make some money off the confusion.
As Pokemon and the companies that profit from it -- most notably 4Kids Entertainment (KIDE) (see article) -- have shot up since the beginning of September, day traders and small investors (see article) have loved the stocks. But not everyone believes that the Pokemon frenzy has legs. Short sellers -- those investors who borrow shares they don't own, sell them and plan to replace them later with stock they hope to buy at a lower price -- have gotten all over these stocks like white on rice. But as the stocks have soared, short sellers may be covering their positions before their losses mount higher, sending the stocks even higher -- and making them look even more precarious. But at least some investors -- including one large institutional owner -- think those who believe the conventional "it's just a fad" wisdom are all wet.
To the shorts, it's a little absurd, really, that 4Kids, a company that doesn't really make or sell anything except the right to make toys with certain images (and you can bet that Nintendo wishes it had never sold those rights), has a trailing 12-month price-to-earnings ratio of 111.4 -- and this without a dot.com in its name.
So between Aug. 15 and Sept. 15, short sellers rewarded 4Kids with a 231% increase in shares shorted, up from 757,000 to 2.5 million. If they're right, and the stock price crashes, they'll cover their shorted positions and make their money. But what if these short sellers are wrong? Well, when a stock's price moves upward sharply, as 4Kids' did on Monday, short sellers' brokers can force shorts to buy shares to cover their shorted stocks, thus causing a further rally in the stock price.
Most-Shorted Stocks
RANK COMPANY
NAME # OF SHARES
1 Intel 40,931,698
2 Cisco Systems 35,388,333
3 Amazon.com 34,881,097
4 Dell Computer 31,365,387
5 Microsoft 28,653,242
6 MCI WorldCom 26,916,494
7 Global Crossing 26,637,950
8 E*Trade Group 25,575,390
9 Nextel Communications 22,568,748
10 Qwest Communications Int'l 22,199,923
11 Oracle 20,272,039
12 PeopleSoft 16,534,208
13 Global TeleSystems Group 15,948,859
14 Qualcomm 15,683,072
15 AmeriTrade Holding 14,822,553
16 Sun Microsystems 14,521,901
17 Globalstar Telecommunications 13,844,007
18 At Home 13,333,729
19 Iridium World Communications 13,306,601
20 Comcast 11,982,095
Data as of 9/15/99
Sources: Nasdaq & ViWes Web Services
What is fascinating about this is not so much the number of shares being shorted: 2.5 million is nothing next to the 40.9 million shares of Intel (INTC) that were shorted on Sept. 15. Nor is it the days of trading at average volume that it would take to burn through the shorted shares: Because of the stock's heavy daily trading average, that number of days (1.38) is actually lower than the Nasdaq average of 2.23.
Rather, it is the percentage of all shares being shorted that is astounding. Of the 11 million existing 4Kids shares, some 54.5% of those are owned by insiders. That means the number of shares available on any given day (aka the "float") is five million. Ah, the light bulb pops on: That means about 50% of the public shares of 4Kids were shorted as of Sept. 15, the day the last short interest report was filed. Which means when there is a rally, the shorts can get killed.
Not surprisingly, investors in the stock can't for the life of them consider shorting it. "[The number of shares shorted] is almost inconceivable because everyone who's short the stock at some date has to buy the stock back to cover their short position, and that makes an incredible upward pressure on the stock. As the stock goes up, people who are short will be forced to either put up additional cash to support their position or to buy back the stock," says Tom Bates, a 4Kids investor, New York management consultant and venture capitalist who goes by the handle "millionairewannabe" on the stock's Yahoo! message board.
So what's happened since the Sept. 15 short report? Well, with the increasing frenzy surrounding Pokemon -- including articles about kids being mugged for their cards; other stories about parents complaining that their children are being "taken" by bigger or smarter kids in schoolyard card trades; and excitement about the upcoming (Nov. 12) Pokemon movie -- the stock's up more than 40%. Looks to us like someone must have suffered a bit of a short squeeze at the paws of Pokemon character Pikachu. We'll know if the shorts are still in it or have chickened out when the next report comes out on Oct. 27. (Short interest data can be downloaded from the Nasdaq's Web site.)
The argument against buying into the stock now (the Icarus-flying-too-high theory) is obvious, and the doubt is palpable (Exhibit A: the short interest). But the reasons that 4Kids might just keep going are interesting -- even leaving aside for the moment the possible impact of a short squeeze. If what the stock's proponents say is correct, it could see a run through the holiday season, thanks to the movie and another album of Pokemon songs.
"If you think you've heard a lot about Pokemon now, wait until November and December," says Joseph Besecker, president and CEO of Lancaster, Pa.-based money-management firm Emerald Advisers (which holds over 500,000 shares in 4Kids). According to Besecker, other companies like Burger King (part of Diageo (DEO)) and Warner Brothers (part of Time Warner (TWX)) will be spending $30 million to $80 million this holiday season to market Pokemon products, which will directly benefit 4Kids.
Still, even if the Pokemon excitement continues as Besecker and Bates predict, and even if the stock follows suit, it's got to seem a little surreal for company execs (not least for Chairman and CEO Alfred R. Kahn, who receives 10% of pretax profits in addition to a base salary and stock options). So you can hardly blame the company officers and beneficial owners who, perhaps shocked by their sudden good fortune, registered to sell some 202,000 shares worth about $9.8 million in the first three weeks of September. In fact, we can't blame them at all. |
