Replies to post #1495 on Nuverra Environmental Solutions Inc. (fka NESCQ)

[Hampden]

The trashing and thrashing of NES is to be expected, especially with the still very large short interest. I wouldn't be surprised to see one more negative article published before 3Q reporting. The smarter short players have been using those negative articles and the resulting price drops as an opportunity to close out their positions. Already, short interest has declined by more than 10% during the last few months. However, it still stands at a relatively hefty 35.8 million shares or about 25% of the float, requiring, on average, at least 15 days to cover in full. The longer-term shorts need NES to fail to meet 3Q expectations, or many of them will find themselves chasing the stock upward.

I consider it a bullish indicator when the short interest tapers the way NES has done recently. I've personally observed this pattern in many stocks through the years. The smarter shorts close out their positions at the lows, but the bulk of the shorts hold on, even as a bullish reality sets-in.

One stock, for example, that I bought and still hold, Cheniere Energy (LNG), also had a relatively large short interest when the stock was priced at about $3. The shorts' motivation for remaining short was LNG's crushing debt without sufficient cash flows. (Sound familiar?)

However, I believed in LNG's business model and its management (and still do), and I also believe that the problem of sufficient capital can and will be addressed by businesses that have a sound model. Even as LNG began to prove the value of its model, and the stock price followed, trading in the $5 to $7 area, the short interest was still enormous--and there was nonstop chatter about LNG's "crushing debt." But LNG's management again demonstrated that the business plan and model was sound, and new capital soon followed. Sure, LNG had to issue new stock of its own to build that capital, and there were resulting periodic hits to LNG's stock price, but the institutional interest also started to increase. Today the stock is trading in the $35 - $37 per share range, and at new highs (and that's with all that new stock added to the float).

I'm not saying NES is another LNG--at least yet. The value of NES's business planning and model has yet to be sufficiently proven. (Actually, LNG's isn't sufficiently proven either, but it's well on its way.) But many of the elements are in place for NES's model to succeed. And at least 10% of the former shorts agree. But even if NES should have a great 3Q, don't expect the negative articles to cease. Expect more, especially emanating from the not-so-smart NES shorts that are still holding on. Like the shorts of LNG, a good proportion of them will be in denial even as the results go against their wishes.