To all,
The following is a recent post on the Motley Fool Iomega board. Interesting opionion, no?
I've seen all kinds of "theorys" about Iomega over the last 3 years, but not rationale quite like this one.
Sorry about the wide format. Can't figure out how to fix.
Tried wordwrap on two different text editors with no success.
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Subject: Flirting with PE 20
Date: Sun, Feb 22, 1998 15:41 EST
From: JTBldrCO
Message-id: <19980222204100.PAA22191@ladder03.news.aol.com>
>>>
IOM may fetch a P/E of 8, like INVX, and still sell where it was two years ago. It has a great product and brand recognition but its management and public relations just can't sell the story to Wall Street.
<<<
How Come We Flirt with PE 20
Not to beat a dead horse, but this stock is not below where 'in the know' investors would peg it because of any company short-comings. Heck, look at the negatives surrounding Microsoft and its PE of 53 (no, I am not down on MSFT - or IOM for that matter -- see way below).
The reason IOM stock is held back is the unparalleled shorting activity (some is actually a "logical shorting" -- see below).
If you want to know more about my point, read below, otherwise, put your head back in the beach. Also, I am tired of debating this over e-mail and will not. Flame or flail all you want. I am writing this to try to educate some confused investors who are vulnerable to this situation.
What Kind of Shorts
Before I start into the evidence for shorting activity, let me point out that this activity is not the kind that shows up in a report in Barron's every month. That is, it is not shorts that sell and wait weeks or months to cover while the market reacts to future earnings reports and competitive actions. These short sales are covered intraday (same day), often at a lower price, meaning that some shorts are cashing-in big time. It _would_ be a
zero-sum game, with winning shorts profiting from losing shorts overlaid on a general upward trend in the stock price as the market rewards company successes ... except for the tremendous effort to cap upward price moves that I have seen no where else in the market.
In fact, if you want to get my attention in a rebuttal to these points, you show me similar selling pressure in any other stock in the world, bar none.
Proof of Short Sales
The shorting activity in IOM is evident if you have an intra-day stock quoting service that states "Bid size" and "Ask size" at any moment. Without that, you can still see what I mean by viewing intra-day (5-minute) stock charts from the internet Start with www.quote.com. Where you want to end up is --- (!!!)
"http://fast.quote.com/fq/quotecom/chart?symbols=iom&time_period=5-minute%20Bars&bars=420&newstype=480%20x%20360%20GIF&chart_type=Close%20Only&colors=Black%25%252C%20Green%20on%20Transparent&vol=Volume&study=Exponential%20moving%20average&ma_period=50&key=&mode~„c"
This part of Quote.com is a NO-CHARGE service (presently).
In the intraday quote sevice with bid/ask sizes you will often hear ask sizes of 500 to 1000 to (sometimes) 2000 lots. This translates to 50,000 shares to 200,000 shares offered for sale at any time. Other stocks have ask sizes quoted at 10-100 routinely. If the ask is sold out to buyers, the price moved up.
NO OTHER STOCK ever, ever SHOWS THIS KIND OF SELLING PRESSURE.
This results in a price line on the Quote.com charts that looks like it was painted with a 4 inch house brush (we are not talking water-colors, here). Vast amounts of shares trade see-saw between bid/ask differentials of 1/16.
The effect of this presure is that no good news, no lightweight positive tidbit on cable TV is going to break out this stock through it's daily ceiling. More often, buyers acquiese and sell into the pressure, and the price inches down. Mid or late in the day, the shorted sales are re-acquired at the lower price.
On a good day, some covering is done above the selling price, you will then see renewed overhead pressure the next day as determined traders strangle upward moves. Some days the upward pressure gets too great and a mini-breakout occurs. Up the price goes -- $1, $2. Shorters stand back and let believers commit more funds thinking the next major move is at hand. Then they step in after some pressure is released and down goes the stock ... -3/16 per
day, while they take charge again.
I THOUGHT NO STOCK WAS AVAILABLE FOR SHORTING???
Answers: AGAINST THE BOX and LOGICAL SHORTING
Two factors work around this perceived restraint to shorting. First, smart traders have substantial holdings in IOM and "short against the box." That is, they short their own shares, buying back at a lower price and improving the performance of their portfolio (see below for the ironic positive news of this fact). The second source is what I have refered to as the logical shorting of the stock.
I will draw criticism for use ot this term, since it is not technically shorting at all. But the net effect is identical to a market where sufficient shares are available for shorting for all who wish to short IOM. Here is what it is and why it is logically identical to short selling.
Most traditional investors follow a philosophy of Buy-Low, Sell-High. The trader using short selling -- "logical" or actual -- follows a tactic which seeks to Sell-High, Buy-Low. Since sufficient shares for shorting are not generally available, he must 'manufacture' his own supply by actually starting with a supply of shares. While this initial purchase represents upward price pressure, his "weak hands" (willingness to sell the stock, with small
gains, over and over) serves to limit sustained upward price moves. In the end it is a vast game of "chicken" attempting to sell into up moves and buy back lower later. Do the math on a portfolio that gains 0.5% per day. You will never again drive a three-year-old car.
When the stock moves $1, $2, $3 dollars in a day or two, it is no big deal to these traders. They step back and let the action slow, then start to take the regular 0.5 - 1.0% daily gains again. Look at the volumes vs the price moves.
SO WHAT'S A POOR BUY-AND-HOLD INVESTOR TO DO???
First, recognize that the stock will see high volume and low price moves and see-saw back and forth. You can try to time your buys and sells, or you can get out, or you can view it intellectually rather than emotionally. But following the price day-by-day is confusing and frustrating.
Largely, the company is a very good one and will do well over time. Long-term investors should be rewarded. Two- to three-year investors definitely have already been rewarded. If you cannot take the heat ...
Right now, the stock is a tremendous value. Much negative publicity exists. Not only was there disappointment over recent earnings news, but the (ridiculous) shareholder lawsuits compound the negative news. Along with the aggressive shorting efforts comes missinformation and disproportionately reported facts like hardware failure rates. These are now all factored into the stock price. They cannot cause further price drops. But the shorting can.
On the positive side, new products are out, Buz and Jaz 2GB. Clik! remains a promising cost-effectiveness leader in a market anticipated to grow over the next few years, it does not need to be the smash hit of Zip to contribute.
Zip and Jaz continue to sell at one to two orders of magnitude over the closest competition. Their success is more assured than General Motors or United Airlines, and their growth is dozens of times greater. Competition is (sorry, folks) pathetic. Realizing that there are real people and real investors behind the competition is saddening. Fortunately for them, there is enough business overall that the crumbs (like annoucement of a sale of 2000
LS-120 drives to E&Y, while Zip sells maybe 10,000 per day) will feed a few in the interrim.
As mentioned above, there is an ironic twist to those shorting against the box and those buying for logical shorting activity. The proof is 'in' that the unbriddled optimism of 1996 can be controlled. It is hard to imagine this stock going up 200-400% this year. Yet holders of the stock are likely all pretty sure that the company will succeed and do better year by year. While waiting around for that, why not churn the stock price some and make
double money selling into ups and buying into downs. If possible on a daily basis, why not?
So the irony is that these traders are comfortable buying shares of a stock they intend to short. The shares' value will not disappear (as is the case with some stocks that make good shorting candidates). Long-term, owning the stock is the right thing to do. In the meantime, party on.
Bottom line, 18 - 36 months downstream, you will be among those who cites the fact that IOM could have been had for a mere $8-9/share in '98. Will you be among those who cites your own purchases at that level? Or would you prefer to pay $15? Guaranteed, you'll have the chance.
- JT |
