|Stocks To Short?
Vincent Rex Ramirez, aka VREX, is another fine contributor to our shorting
stocks folder. Vince is a part-time trader and full-time geologist doing
international exploration. Mr. Ramirez hosts a stock club called SEC Search
and every day, all 24 members of the club do their homework by scanning all
documents filed with the SEC. How Foolish! Thanks Vince :)
CD Radio (Nasdaq: CDRD)
1001 22nd St. NW, 6th Fl.
Price - $16 5/8
CD Radio (CDRD) is a current darling high-flyer with a lot of potential trouble
ahead. They are involved with the development of a subscription based satellite
radio system -- CD quality radio, without advertisements.
From their recent SEC S-3 filing:
<<The Company is a pioneer in the emerging satellite-to-car broadcasting
industry ("satellite radio"). ...development of a subscription based satellite
radio system for the nationwide broadcast of 30 channels of commercial-free,
compact disc quality music programming and up to 20 channels of all-news,
all-sports, and all-talk programming. >>
In my opinion CDRD makes a great short for two reasons. Their fundamental
economic model is bad, and the dilution to share holders is huge, considering
that they just sold in a private placement $135 million of 5% Delayed Convertible
Preferred Stock (convertible to common stock at conversion prices based on
discounts to future market prices - making about 9 million more shares).
Additionally, the company will need $500 million more in capital in order
to construct and launch the satellites necessary for this business. Keep
in mind that there are currently 10 million shares, of which 4 million are
in the float. The additional 9 million converted shares from the list of
37 selling shareholders (many in offshore companies) will be a slaughter
to the share price. The additional $500 million will be another problem,
and worse, at some future time.
Other weak points: no manufacturer for the actual radio receiver, and customers
will have to buy these new radios on a monthly subscription business (estimated
at $10 per month). After all of this, you get -- another radio station!
At an estimated $10 per month per subscriber, it is going to take a while
to make a profit on the $635 million investment, if ever. Investors will
wake up sooner or later to the fact that the recent run from $6 to $17 was
a little premature, if justified at all.
Risks (what would make me change my mind): the number one concern here is
a short squeeze. Short interest reported for May is up 33% to 922,000 shares.
Average daily trading volume is 130,000 shares, so the stock is currently
at about 7 days trading for all shorts to cover. While this is not an extreme
amount, this is about 24% of the outstanding float. While this will reduce
to 7% of the float during the conversion, a short squeeze in the meantime
could cause trouble, no matter what the cause. An increase in the outstanding
short interest to 2 million shares should be reason for concern during this
trade due to the squeeze risk.
The SEC S-3 form filed in early May is key to this short position working
out. Within several weeks, perhaps 5 or 6, the final S-3/A should be filed
and at this point the conversion of the preferred shares into common shares
will begin. This selling pressure should have a strong impact on the stock
price, as the float will be tripled, from 4 million to 13 million shares.
This will not occur at once, but rather gradually, due to the schedule of
discounts for the conversion (See the SEC document here). A cancellation
of the discounted share conversion due to capital being raised by some other
means could be detrimental to a short position. This is difficult to imagine,
but it is a risk, nevertheless.
My target price to cover is $8. Due to the stocks recent run up from $6 to
$17, the anticipated decline may reverse with equal frenzy, right back to
$6. However, due to the large short interest, covering at $8 will be quite
reasonable and perhaps save some headache at a time when the price will be
Next Article: More
Shorts - 09/27/96
* This column represents the opinion of one Fool and in no way should
be taken as the opinion of either the Motley Fool, Inc., the company in question
or representative of anyone or anything else other than that specific Fool's