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  1. Brandon Matthews is offline
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    Joined: Aug 2008 Location: Northeast Posts: 721
    03-08-2009, 02:09 PM #41
    To understand a reverse split, we should acquaint ourselves with the shorts view of shorting stocks that perform reverse splits...

    The pitfalls of shorting reverse splits
    Even though 75% of reverse splits end up declining, it is not as easy making money shorting them as you might think. The 25% that go up can go up so much they wipe you out, says Andrew Lo, a finance professor at Massachusetts Institute of Technologys Sloan School of Management.

    For example, j2 Global Communications (JCOM, news, msgs), which provides messaging services, shot up an impressive 800% to more than $27 recently. Its reverse split came just 18 months ago. With that kind of risk to shorting these stocks in mind, here are the key investing rules to keep in mind.

    Avoid shorting companies whose prospects improved around the time of the reverse split. Interstate Hotels and Resorts (IHR, news, msgs), a small Washington, D.C.-based hotel management company, slipped to $2.50 per share from $3.40 immediately after it announced a 1-for-5 reverse split at the beginning of August. Anyone who stayed short through that reverse split would have gotten crushed by now, however. The stock has moved up 60% to around $4 per share recently, in part because of moves to cut costs and improve financial strength following a merger, says John Emery, the president of the company.

    You also have to consider the fundamentals for a companys sector, of course. Lucent, which is asking shareholders for permission to do a reverse split because its shares are hovering dangerously close to the $1 mark, believes it will be profitable next year. But if overcapacity and weak demand for telecom equipment continue to plague the sector, Lucent shares will be a good short if it goes through with a reverse split that would take shares back up above $15.

    Avoid shorting the reverse split stocks with decent financial strength. Ethyl (EY, news, msgs), a small Richmond, Va., producer of fuel additives and lubricants, might have appeared to be a good short candidate after it did a reverse stock split at the end of June. But a closer look would have revealed good enough cash flow to survive -- despite high debt levels that were troubling investors.

    Sure enough, Ethyl -- which has no coverage by Wall Street analysts -- recently tacked on a short-killing 50% when it announced good quarterly results. Most of the penny stocks that do reverse splits have cash flow problems, says David Fiorenza, finance chief for the company. But we make stuff and sell stuff and we have good cash flow. The company is also around 30% owned by insiders, another sign of strength to watch for.

    Avoid shorting companies doing a reverse split for appearances. After AT&T spins out its broadband business to Comcast (CMCSK, news, msgs) in the days ahead, the phone companys shares will trade in the $5 to $7 range. Thats not low enough to get kicked off the New York Stock Exchange. But it seems too low a price for a company with $40 billion in annual revenue. Thats one reason AT&T plans to do a 1-for-5 reverse split to move its shares into the upper $20 range.

    Other tips
    Remember that reverse stock splits that dont take a companys shares above $5 may be difficult to short, because its often hard to short stocks below $5. Most reverse splits, however, do move shares back above $5. Typically the less dramatic reverse splits -- like a 1-for-2 swap -- dont suffer as much. If you are hunting for reverse splits to short, look for cases where massive changes are needed to get a stock up to a respectable price level, like Palms conversion of 20 shares into one share.

  2. cos1000 is offline
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    Joined: Mar 2008 Posts: 402
    03-08-2009, 02:09 PM #42
    Old Druid, and Mr Finn,

    I think relmor is correct in wanting to wait before deciding... on the best thing to do, but the general psychology of a company eliminating share dilution and in turn artificially inflating the stock price through a r/s is more a sign of weakness than one of strength. With Sirius Xm having so much of its debt being formed in convertible bonds tied to common shares for hedge and at maturity, and in paying off debt by issuing shares, it will really be determined by the momentum of the company and at the time of the announcement.

    There is no question that there are too many shares outstanding at this time, but if Sirius Xm is forced to R/S because of a threat of delisting, I would close my position, keep it on a watch list, and be very careful in getting involved again...

    If the company his firing on all cylinders, beating numbers and growing subscribers by the time it decides to take shares off the market, I might keep my position and just ride through any rough patches in sp by buying more shares to improve my after reverse position... I will depend on the ratio, existing growth, debt coming due, COH, and FCF, before any decisions can be made.... Can you imagine a R/S in November, and then selling shares for cash to pay of the May debt extension in 2010??

  3. relmor2003 is offline
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    Joined: Oct 2008 Posts: 1,937
    03-08-2009, 02:14 PM #43
    Quote Originally Posted by cos1000 View Post
    Old Druid, and Mr Finn,

    I think relmor is correct in wanting to wait before deciding... on the best thing to do, but the general psychology of a company eliminating share dilution and in turn artificially inflating the stock price through a r/s is more a sign of weakness than one of strength. With Sirius Xm having so much of its debt being formed in convertible bonds tied to common shares for hedge and at maturity, and in paying off debt by issuing shares, it will really be determined by the momentum of the company and at the time of the announcement.

    There is no question that there are too many shares outstanding at this time, but if Sirius Xm is forced to R/S because of a threat of delisting, I would close my position, keep it on a watch list, and be very careful in getting involved again...

    If the company his firing on all cylinders, beating numbers and growing subscribers by the time it decides to take shares off the market, I might keep my position and just ride through any rough patches in sp by buying more shares to improve my after reverse position... I will depend on the ratio, existing growth, debt coming due, COH, and FCF, before any decisions can be made.... Can you imagine a R/S in November, and then selling shares for cash to pay of the May debt extension in 2010??
    Excellent post. I think that should be the angle we all play here. Wait and see. I guess as in most things in life, TIMING IS EVERYTHING. When and why are they doing it would be a huge consideration.

    Excellent information Brandon. Thanks for sharing. Reviewing the past would be very helpful here, as we can all learn from the past.
    Last edited by relmor2003; 03-08-2009 at 02:17 PM.

  4. OldDruid is offline
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    Joined: Feb 2009 Location: North Carolina Posts: 116
    03-08-2009, 02:20 PM #44

    I love these smilies things!!

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