A Small Voice In Cyberspace

[Georgia Bard]

Save Our Stock
http://www.forbes.com/forbes/2001/0219/113.html;$sessionid$HJCXREAAAAF4XQFIAGWCFFA
Chana R. Schoenberger, Forbes Magazine, 02.19.01

Is there some flaky concept stock that you would like to sell short? Be forewarned: You could get caught in a short squeeze. Companies that don't like short-sellers are rounding up loyal shareholders in schemes that choke off the air supply of the shorts.

It's all perfectly legal—and maybe even fair. After all, bears gang up against companies they have shorted by spreading tales of financial distress. Bulls gang up by removing their shares from borrowable status. That shrinks the supply of shortable stock. When a squeeze like this works, the shorts must scramble for cover, buying back their borrowed shares at ever- higher prices.

Squeezing shares appears to have worked for small Storage Computer (amex: SOS - news - people), a Nashua, N.H. servermaker (market cap: $135 million) trading under the unfortunate ticker symbol SOS. The stock rocketed from 75 cents in October 1999 to $24 in November 2000. Then came a bear raid that knocked 71% off its value. Chairman Theodore Goodlander's response: a Dec. 20 letter to shareholders begging for help against the shorts. The price has since doubled to $9.

How does a loyal shareholder help squeeze the enemy? By putting what is called a "no borrowing legend" on the shares. Often this takes the form of moving shares from a margin account, where, under a typical brokerage contract, the broker can freely lend them, to a cash account. If need be, the shareholder can pull shares out of the stock-loan system by taking delivery of a certificate.

Short squeezes can work for large companies, too. In July Irwin Jacobs, a Minneapolis financier who owns 5% of troubled insurer Conseco, independently waged his own campaign against shorts. He spent $400,000 for full-page ads in the New York Times and Wall Street Journal, calling on fellow shareholders to take their shares "in-house." "It was incredibly successful," says Jacobs of his ad barrage, which he credits with helping Conseco's price to double since.

How does all this go on? Remember how shorting works. The short-seller borrows stock from a brokerage firm, which in turn borrows the shares from a customer with a long position. The short-seller sells the borrowed shares in the open market. Someday he must buy back that number of shares in the open market. If he is able to do so at a lower price, he has made a profit.

The broker can make good money from this activity. The customer whose idle shares were used in the transaction gets no compensation. The broker pockets interest income, around 6%, from the proceeds of the short sale, passing along only a portion of it to the short-seller (or none, if the short-seller lacks clout). Worse, if the stock is hard to find, the short-seller may even have to pay a borrowing fee of up to 1.5%.

Over time many companies have won important, if temporary, victories against the shorts by getting their fans to grab back shares. Presstek, which was working on a supposedly revolutionary printing system (FORBES, June 17, 1996), is one. The stock rocketed to $190 although the shorts insisted that it wasn't worth anything at all. Presstek is down to $11 now, but it is likely that more than a few shorts were forced to cover at a loss long before their viewpoint was vindicated.

Don't expect the shorts to give up, though. Their case against Storage Computer remains intact: Goodlander admits it has a negligible market share in an industry dominated by giants like IBM and EMC. And it has lost money for the last three years. Northland Cranberries tried to freeze out the shorts in 1997, but too few investors went along with its plea. That stock, $17 in August 1997, now goes for just over $1.


:=) Gary Swancey
Contracted Independent Investor Relations for
CBQI & DTGI, compensated a monthly cash fee
http://www.marketex.net/compensate.htm