K-Tel online catches analyst off base
Short-sellers not feeling groovy after stock's rocket ride
By Darren Chervitz, CBS MarketWatch
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NEW YORK (CBS.MW) -- If you think you're confused about the meteoric
stock rise of record label K-Tel, consider Anthony Elgindy.
K-Tel (KTEL) shares took off April 10 after the music retailer announced
plans to open a storefront on the Internet. They climbed 500 percent in
the next six sessions.
After the market closed on Thursday, Elgindy, the chief analyst at the
investment brokerage and notorious short-seller Key West Securities,
called the stock "severely overbought" and warned that it could fall
"very quickly" to "a more appropriate range" between 5 and 7.
The next morning, however, Elgindy reversed his call, urging investors
to buy the stock on market dips and setting a 30 to 50 price target
range.
What gives?
According to Elgindy, the dramatic opinion change came because he
realized the "public's insanity was more powerful than reality" and that
his firm could no longer afford to be short the stock.
The next morning -- and after issuing the rating reversal, according to
Elgindy -- Key West began covering its short position at 21 to 23 a
share and then started building up a long position, which it sold Monday
morning at 36 to 37 a share. Short-sellers borrow shares in a company in
hopes of buying it back at a lower price and pocketing the difference.
For now, Elgindy still has the same rating on the stock, but added that
he "cannot in good conscience tell somebody to buy" K-Tel at current
levels. On Monday, the stock gained 12 15/16 to 41 5/8, on volume of
14.1 million shares.
"Every single original shareholder in K-Tel should have gotten out by
now, and if they haven't, they should be shot. Disco Days aren't going
to get any better than this," said Elgindy.
ÿKTEL
NASD
LastChg.46+4ÿ3/8% Chg.Vol.+10.51%N/ADay Lo.Day Hi.42ÿ1/448ÿ3/4OpenPrev.
43ÿ3/441ÿ5/8
As of
Apr 21/98 2:34 pm ET
Last Trade
Apr 21/98 2:19 pm ET
15 MIN. DELAY
Elgindy added that he would issue a "sell" rating if the stock hit 50, a
feat which, although within reach now, seemed impossible on April 9,
when K-Tel first announced plans to open its "K-Tel Express" Web site
next month. The company had actually been working on its online
operation for a while, mentioning it very briefly in its fiscal second
quarter earnings report in late February.
It wasn't until the April press release that investors noticed K-Tel,
which made its name hawking compilation records on late-night
television. What's followed has been a classic, extremely risky battle
between the shorts and longs.
With a float as miniscule as K-Tel 's -- about 900,000 freely trading
shares at last count -- price movements often become exaggerated when
good news is released.ÿ
As buy orders from investors come in, people need to be willing to sell
the stock. But with a small float, chances increase that not enough
investors will be willing to sell unless the market price goes up. As
the price rises, more and more short-sellers must cover their positions
by buying back stock. The number of buy orders increases, forcing the
price even higher until demand and supply are once again in equilibrium.
This process, called a "short squeeze," helps to account for K-Tel's
stock rise.
In many cases, however, the stock price usually returns to a price level
based on the fundamentals of the company. Of course, investors disagree
about how K-Tel should be valued. Elgindy admits that if the company is
valued like other online music stores N2K (NTKI) and CDnow (CDNW), the
stock could rise even further. K-Tel, after all, has generated $92.1
million in revenue and $2.2 million in profit during the last 12 months.
But K-Tel hasn't yet made a dime on the Internet. The company hasn'tÿ
demonstrated it has the technology or the strategic relationships that
CDnow and N2K have spent several years and millions of dollars building.
A K-Tel spokesman declined to reveal specifics about the upcoming site,
other than to say it's on track for a May 1 launch and will include more
than 250,000 selections. The company will release more news about the
site in the coming weeks, the spokesman said.
Elgindy said he expects the stock's volatility to continue for some time
and that the launch of the Web site may cause the stock's price to rise
even further. He says his firm, although still a market maker in the
stock, no longer holds a position in K-Tel.
"There will be a rude awakening, and the public will pay the most," he
said. "You can say what you want about Wall Street, brokers, market
makers, etc., but when it comes to outright greed, the public wins hands
down."
ÿNot everyone is making money as U.S. stocks and bonds soar. There are
actually investors, believe it or not, who buy or sell a stock,
commodity, piece of art or security at the wrong time. CBS MarketWatch
readers, if you have a five-paragraph tale of clueless adventures, email
it to the CBS MarketWatch NewsRoom.
Darren Chervitz is an online reporter for CBS MarketWatch.
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