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Strategies & Market Trends : Due Diligence - How to Investigate a Stock -- Ignore unavailable to you. Want to Upgrade?

To: Nazbuster who wrote (247)	4/25/1999 6:40:00 AM
From: Frodo Baxter	Respond to of 752

All this talk about RRRR got me interested, so I took a good look. I am responding to you because I think your premise for shorting this stock is flimsy. To address all the issues brought up: 1) Pump and dump- No evidence for that. To my knowledge, Apollo has never pumped and dumped, although they are known as vulture investors. 2) Going concern qualification; Naz delisting- With the $75 mln equity infusion, bankruptcy or delisting concerns disappear off the horizon. 3) liveuniverse.com acquisition- Kinda chintzy website. Claimed membership of 200,000. I'd say $10 mln, tops. 4) Terms of Apollo investment- Not spelled out, but we can make reasonable assumptions. Low end, if we assume 30 mln shares are outstanding, fully-diluted, that means Apollo is buying 10 mln shares at $7.50 per, with warrants for 10 mln more at $7.50. Even if we exaggerate that to 40 mln fully-diluted, that only changes Apollo's numbers to 13.3 mln shares and warrants at $5.63. These are eminently reasonable terms considering the company's former precarious financial position and where its stock was trading at before the investment. 5) "Floorless" convertibles- Not really floorless; the floor is $2.49. But big deal! $6 mln / $2.49 = 2.4 mln shares, which is trivial. In any case, the stock isn't going that low. Would I buy this company? Of course not. They have no record of achievement, a bubble-mentality roll-up business plan, and a shoddy record at maintaining liquidity. Besides, Apollo's investment fixes their enterprise value at a generous $225 mln. Why should I go higher? Yes, the stock got bid up. Yes, both Apollo and CVI got sweet deals for relatively low risk. But I wouldn't recommend shorting Internet stocks just because someone else got rich buying them! And I certainly wouldn't short them for the usual reasons: unprofitability, questionable probability of success, etc., etc. Again, to be clear. RRRR has no liquidity crisis and no short-selling convertible owners.