A Greenberg sampler
By Herb Greenberg, CBS MarketWatch.com
Last Update: 12:01 AM ET April 12, 2004
SAN DIEGO (CBS.MW) -- I don't have a watch list per se, but there are plenty of companies that for one reason or another show up in my column over and over and can be expected to be mentioned here from time to time.
Most have red flags flapping furiously over them, such as, in no particular order:
Novastar (NFI: news, chart, profile): This Kansas City-based subprime mortgage lender's stock has more than tripled since I first started questioning it well over a year ago. Don't I look like the ultimate fool? Yes, but I wouldn't change a word. Just because stocks go up doesn't mean critics are wrong; it means, well, the stock went up -- in this case, in part, because of attempts to chase out short sellers, who bet that a stock price will fall.
All that has really changed, however, is that the quality of the company's earnings has fallen, as has the quality of the company's borrowers, measured by their FICO scores. At the same time, with interest rates unlikely to go much lower, competition from the likes of Countrywide Credit (CFC: news, chart, profile) has increased. Investors flock to this mortgage REIT, however, because of its relatively high dividend yield -- certainly one of the highest for any mortgage REIT.
But with high reward comes high risk. Could the stock's recent almost-overnight 20-percent swoon on fear of higher interest rates be a preview of things to come? Stay tuned.
Novastar, for what it's worth, has a No-Greenberg policy: it doesn't return my phone calls and won't answer my questions.
AutoZone (AZO: news, chart, profile): When you strip away the hype, Memphis-based AutoZone really appears to be nothing more than just another low-inventory-turn auto parts retailer pretending to be a galloping growth company. I like to refer to it as a tortoise dressed up as a hare. Same-store-sales growth in recent quarters has resembled a sputtering engine. The company, which takes my calls, insists that it has fixed the problem.
BioLase (BLTI: news, chart, profile): No-pain dental lasers for all sorts of dental procedures. That's the story San Clemente, Calif.-based BioLase likes to tell.
Truth be told: Pain is in the nerve endings of the beholder, and there are no studies to support the claim. In fact, there are no studies to support quite a few of the company's claims.
And that's only scratching the enamel of what certainly is one of the most fascinating stories I've tracked over the past year. (Especially when I consider how the company has tried to dodge my questions.)
BioLase, which spends heavily at marketing -- and which has impressive competition that is not publicly traded -- will only speak to me through an outside public relations intermediary.
United Surgical Partners (USPI: news, chart, profile): An operator of outpatient surgical centers, Addison, Texas-based United Surgical's financials are so complicated you'd swear it's really a financial services company.
A big question I've been asking lately: What's with the slowdown in organic growth? Depends how you define organic.
With its relatively high valuation, investors may eventually need anesthesia if all doesn't go exactly according to the company's plan -- whatever that is. Company, to its credit, does take my calls.
MBIA (MBI: news, chart, profile): Talk about complicated, this Armonk, N.Y.-based bond insurer may take the cake. Short sellers have been raising flags here for longer than they'd probably care to remember, but the twists and turns are compelling enough to warrant continued coverage.
My favorite story was how a few years ago the company took out some retroactive reinsurance that was used to cover losses after the fact. Had the losses not been taken it's unlikely management would have earned its bonuses.
Nobody cared then; they care even less now. (Too bad!) A recent change in top management bears watching. The company, however, does take my calls in an attempt to answer my questions.
1-800-Contacts (CTAC: news, chart, profile): Financial results for this Draper, Utah-based online retailer of contact lenses have gone from bad to worse lately -- so much so that the only analyst tracking the company recently dropped coverage. Plus there are loads of low-priced competition. I've even questioned whether the company illegally sells lenses in New York.
Contacts never answers my questions; its refusal to respond suggests an active No-Greenberg policy.
AaiPharma (AAIIE: news, chart, profile): I once called this Wilmington, N.C.-based specialty pharmaceutical company a company in search of a business. For a number of years it made several changes in its 10-K description of itself. It finally seemed to find its niche when it started buying the rights to older drugs from big pharma companies. (Proving, once again, that Barnum was right!)
Critics clamored for months that the company was stuffing its distribution channel with more product than it could possibly sell. An internal inquiry found "unusual sales." Regulators are investigating.
The CEO has since stepped down and the company still hasn't filed its latest 10-K, putting it in possible violation of loan covenants. Its stock subsequently got whacked, but short sellers, noting the company's desperate need for cash, think the fun has just begun. To be sure, on Friday, AaiPharma filed an 8-K with the SEC saying that if it can't improve its financial picture it may need to file for bankruptcy. The company, which has had an active No-Greenberg policy in effect for more than a year, also disclosed that it has received subpoenas from a grand jury. AaiPharma also said that it has been advised by the U.S. Attorney for the Western District of North Carolina that it may receive a subpoena from the SEC. (Nothing like relegating the bad news to a filing that hit the SEC on a day everybody on Wall Street was at home.)
Now for something completely different
Meanwhile, contrary to what you may have heard, I also have written my share of stories with a positive bent, such as:
Zix (ZIXI: news, chart, profile). The Dallas-based company is best known for its e-mail encryption software. It's also known as one of Dallas Maverick owner Mark Cuban's largest short positions. (Gotta love Mark; at least he puts his money where his well-known mouth is.) Adding to the tension: It's also a popular short for some of my best sources.
But in keeping with the contrarian nature of this column, I started mentioning it positively at around $9 because of the potential for its e-prescription business; it's now trading above $16. Zix is vying for a piece of the business with a dozen or so other companies, but it's believed to be well ahead of the pack.
With e-prescribing, Zix or one of its competitors gives the docs Blackberries or other types of PDAs to electronically write prescriptions and then send them online to the pharmacies. The e-script companies get paid by transactions fees paid by multiple sources, including pharmacy benefit companies. Key for Zix: Execution.
Don't be surprised if the stock is volatile until the transaction revenues start showing up in more than a token way, something that should start to happen (if it's ever going to) over the next six-plus months. (Sometimes I think if this company succeeds it will be in spite of itself.)
Cleveland-Cliffs (CLF: news, chart, profile): When I first heard someone mention Cleveland-based Cleveland Cliffs a little over a month ago, the stock was around $55 (it's now around $64) and it just seemed such an out-of-step name. But at the time I wasn't paying attention to what had happened in the steel industry or the price of Cleveland Cliff's stock, which had already posted an impressive gain.
The crux of the story: The largest U.S. producer of iron ore can expect to see earnings lift if steel prices and demand continue to rise. While nobody was looking, the company started earning money. My best bullish source thinks this year's earnings will be stronger than even the bulls expect, with the stock going sharply higher from current levels. (Assuming, of course, China doesn't pull the plug on demand.)
M-Systems (FLSH: news, chart, profile): My best source on this, Rich Mashaal of Senvest Capital in Canada, loved the Israeli maker of flash memory chips in the single digits and added more in the low 20s. It's now near $23. Bottom line: He believes the company is in the right place at the right time with the right products. One to definitely watch.
This, of course, is just a Greenberg sampler, but in the very least this should give you a flavor of what to expect as we move forward.
Herb Greenberg is senior columnist for CBS MarketWatch.com, based in San Diego. |
