Thanks for your reply, Bob. Here's a BW (May 18, 1998, pp. 151) article about K-Tel. Good day, Marty
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WHAT'S MAKING K-TEL BOOGIE?
Internet fever and short-sellers seem to be
driving the action
The way the stock of K-TEL International Inc. has rocketed lately, you might think
the music retailer has been hyping shares on late-night television. Something like its
commercials for music compilations: ''If you buy K-TEL now, we'll throw in a
collection of disco from the '70s--plus a full-color annual report!''
After all, as recently as Apr. 8, Minneapolis-based K-TEL was residing anonymously
in NASDAQ's lower reaches, trading at 6 5/8 on a paltry volume of 300 shares. Less
than a month later, its share price had risen tenfold, with the trading volume on Apr.
20 blasting past 14 million shares (charts). On May 4 alone, K-TEL shares vaulted
by 19 3/4, or 41%, hitting a new high of 67 3/4. A day later, the stock exhibited wild
mood swings: down 6 points early in the morning, up 8 to 10 in the afternoon, then
down again just before the closing bell. Final tally: up 1/8, on a volume of nearly 13
million shares.
What makes this all the more curious is that K-TEL has only 3.8 million shares
outstanding, a razor-thin float. More than 70% of those are held by Chief Executive
Philip Kives and other insiders. All of which gives credence to widespread suspicion
that K-TEL is being caught up in a colossal short squeeze. K-TEL's executives
refused comment. So did spokespeople at NASDAQ and the Securities & Exchange
Commission.
Some traders see signs of manipulation. ''There are individuals who will search the
Internet for companies with thin floats, thin market capitalizations, and very little in
the way of investor appeal,'' says Tony Elgindy, chairman of Key West Securities
Inc. in San Diego. ''And they will create an aura around these situations.'' David
Barney, editor of Stock Investor Trading News, a tiny Austin (Tex.)-based Internet
newsletter that recently issued two ''strong buy'' recommendations on K-TEL, says
he has been fielding calls from people wondering how he's manipulating the stock, a
charge he vehemently denies. ''We came out with a $100 price target for the stock,''
he says. ''But that was a 12-month target, not a 12-day target.''
Elgindy, a known short, says he reversed his sell position on K-TEL after the stock
closed at $21.125 on Apr. 16, and reckoned then that it could rise as high as $50 in
the following 12 months. Elgindy reversed course again on May 1, when he
terminated coverage of the stock with a sell rating.
K-TEL's fundamentals are certainly no great shakes. For the nine months ending
Mar. 31, it earned $693,000, or 9 cents a share (reflecting a recent 2-for-1 split), on
sales of $64.8 million. Says Michael Murphy, editor of the Overpriced Stock Service
newsletter: ''We now have a market capitalization of almost $300 million on a
company that in a really good year can earn something like $4 million.''
''SOMETHING IS ROTTEN.'' The many online investment message boards contain a
lively discussion of K-TEL's stock performance. ''Something is rotten in Denmark,''
wrote an investor at The Motley Fool Web site. ''Right now, it's not even a stock, it's
a trading machine,'' says Barney. Adds Axxel Knutson, managing director of
Janssen/Meyers Associates in New York, one of the few Wall Street houses to
follow the stock: ''Anytime you see something like this happening, you know
investors are in there smoking something.''
K-TEL's leap from oblivion to the spotlight began on Apr. 9, when it unleashed plans
to sell compact disks on the Web. From that point on, albeit with a few steps
backward en route, the stock headed due north. The new site, called K-TEL Express
(www.ktel.com), was launched on May 1 and generated a million visits in its first
three days of operation. K-TEL also recently struck a deal with BPI Communications
Inc. to display the Billboard music charts at the site and reached an agreement with
RealNetworks Inc. to help consumers create customized CDs online.
But such developments belie the fact that most folks think K-TEL's share price is
ready for a fall. Some investors plunged in, analysts suggested, even after Barron's
ran a negative writeup on the company in its Apr. 20 issue, luring a horde of
short-sellers.
Knutson is so convinced that K-TEL's stock is overvalued that he put a prohibition on
accepting buy orders. ''If we see something that is patently unsuitable and irrational,
we have an obligation to refuse the order,'' he says. Indeed, when one client tried to
buy 10,000 K-TEL shares when the stock was trading at around $45, ''we gave him
Merrill Lynch's phone number,'' Knutson says. Given where K-TEL's stock has gone
since, that's one customer he may not be hearing from again.
By Edward C. Baig in New York, with Gary Weiss |
