These Stocks Need a Bailout of Their Own

The tremor sent through the global financial system was almost palpable. The prospects of seizing the bank accounts of individual Cypriot customers in exchange for a bailout could unleash a wave of bank runs around the world before world governments in equally shaky financial zones could seize them, too. Of course, everyone says that won't happen, but the slippery slope the EU put itself on had the Dow Jones Industrial Average frozen in place, rising a barely perceptible three points yesterday.

The three stocks below faced a run of a different sort as investors turned tail, but don't go running over the cliff with them like a bunch of lemmings just yet: This could just be a temporary situation. Let's first see whether they had good reason to fall as panic-fueled routs can sometimes lead to excellent buying opportunities.

Company

% Change

Harvest Natural Resources (NYSE: HNR  )

(32.6%)

Star Scientific (NASDAQ: RCPI  )

(17.2%)

Glu Mobile (NASDAQ: GLUU  )

(9.1%)

Thank you, sir, may I have another?!
I'm no accountant, so the arcana of accounting rules is all Greek to me, and apparently also to the bookkeepers at oil and gas producer Harvest Natural Resources, which said it may have to restate its financials going back several years because of a whole slew of accounting errors it found.

According to its SEC filing, Harvest Natural said not only were there errors related to incorrect capitalization of some lease maintenance costs as well as for internal SG&A costs, but the company's cash-flow presentation also had an error and some of its long-lived assets have been impaired. Oops. Moreover, it just might also be able to identify "additional material weaknesses." You think?

On top of everything else, the Venezuelan oil and gas operator said it was going to report a loss of $0.26 per share for all of 2012, a tad worse than the $0.87 per share profit that analysts had been expecting. Oh, and its auditor issued a "going concern" notice, which suggests it has substantial doubt about the driller surviving.

Everything is spinning out of control at Harvest ever since India's government rejected its planned $725 million sale of Venezuelan assets to the state-owned Petrodelta. Considering the surprise nature of the disclosures, investors were right to sell en masse. As they say, where there's one cockroach there's usually more, and Harvest Natural Resources sounds like it's in need of an exterminator.

In the spotlight
Dietary supplement maker Star Scientific is also under the magnifying glass following the disclosure that the U.S. Attorney's Office served it with subpoenas in January and February regarding private stock placements that the company made since 2006, along with various related party transactions.

Star didn't disclose any more information than that in the annual report it filed yesterday -- the last day possible to file it -- but the muckraking analysts at Street Sweeper had noted a couple of years ago the uncanny timing of certain private placements that netted insiders including CEO Jonnie Williams millions of dollars in profits. Street Sweeper, which often takes positions in stocks betting they'll fall prior to releasing their report, noted that just a week before a U.S. Patent Office ruling favorable to Star, insiders purchased millions of dollars worth of stock that was trading below $2 a share at the time and soared close to $4 a stub after the ruling.

It's unclear whether that is one of the transactions that the U.S. Attorney's Office is investigating, but it's a good reason why investors shouldn't dismiss out of hand a company's short analysis even if you disagree with it. While Street Sweeper has had a hit-or-miss record with its investigations, short-sellers are usually the only ones willing to look under the rocks and behind the rosy stories companies peddle.

But accusations aren't convictions, and Star hasn't been found guilty of anything at this point, though the drop in its stock yesterday suggests investors aren't willing to wait around to find out.

Game over
After Electronic Arts ousted its CEO and further cut its guidance, causing its stock to fall more than 8%, it's probably not too surprising to see that other gaming names showed weakness, too. Glu Mobile was one of the biggest losers yesterday with its 9% drop, but Zynga fell back more than 1%, and Activision Blizzard lost 2.5%.

Glu has been riding a wave of support following the launch of its first real-money gambling product. The stock was up 58% over the past two weeks before yesterday's pullback, so investors who buy into the bullish theory of it being an online gambling house shouldn't worry. Others like me who are more skeptical of the long-term benefits of the maneuver just might think this is only the beginning.

While Activision and Microsoft have been taking the headlines when it comes to console gaming, Fools following the gaming sector would do well to also keep tabs on Electronic Arts. We can help. Our new special report breaks down the risks and opportunities facing the company to help you decide if EA is right for your portfolio. Click here to get your copy now.


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  • Report this Comment On March 21, 2013, at 2:42 AM, EllenBrandtPhD wrote:

    The Petrodelta deal was with Indonesia, not India. And Indonesia stated just last week that it was Harvest which broke the deal by "asking for a higher amount" and that Pertamina still wanted to do the deal at the "original agreement price," which would have brought in over $13 share to Harvest, irrespective of all its other assets.

    Whether any of this was posturing on Indonesia's part, who knows? But these statements were printed in the country's media site of record, The Jakarta Post, equivalent to a combination of the WSJ and NYT in the US.

  • Report this Comment On March 21, 2013, at 2:44 AM, EllenBrandtPhD wrote:

    Readers might also be interested in the following, posted a few hours ago at Market Watch:

    From Market Watch:

    1. I doubt if anyone except management - and maybe not even them! - WANTS HNR to be a "going concern."

    Pretty much everyone Long the stock wants them to sell the entire asset base - which prior to the Pertamina deal falling through was widely thought to be worth over $20 a share.

    2. Just prior to the blowup, the Short coverage ratio was 3.5 or so, meaning 3 days for the entire Short position to come out - at a presumed rate of 1.5 million shares per day. Yesterday, the volume was about 9 million shares. Now, I don't know how much of the Short position wanted to cover and was able to and did - but those are the stats.

    3. Management is being literally obstructive by refusing to call a press conference, even if they are in deep negotiations with potential new - or maybe even old - buyers.

    They can always say "No Comment" to any questions they can't answer because to do so would be to jeopardize deals. But they need to show up and act unafraid of their own shareholders.

    Re the audit committee: Especially shocking that they would be too timid to come forward, since the chair of that committee, I believe, is the former head of Dresser, i.e. Texas Royalty!

    Be brave, bite the bullet, and TALK to us!

  • Report this Comment On March 21, 2013, at 2:58 AM, EllenBrandtPhD wrote:

    And this follow-up:

    By the way, not only is the chair of the Audit Committee "Texas Royalty," but the blue-chip Houston firm which has done all of Harvest's valuation of resources work is literally at the heart of the US petroleum industry.

    So whoever and whatever is behind this brouhaha is aiming an arrow at much more than Harvest and its market cap.

    I would bet legions of people are hopping mad - and not necessarily at Harvest.

    The Venezuelan election is only two weeks away. Much of what is going on right now is posturing between Maduro supporters and Capriles supporters.

    It's very loud and very nasty.

    But we don't see anyone "punshing" Chevron or Eni or anyone else for their newest deals with the Chavistas.

    As everyone knows - and I do mean everyone! - if the Chavistas were ousted and PDVSA were back in friendly hands, Harvest would be worth $50 a share overnight.

    It is not likely to happen in this election, however.

    That's why Harvest's best bet now is to negotiate heavily with the Russians - just about the only ones the Maduro government really, really likes - to take over Petrodelta and support them or do buy outs of their other international assets.

    Yes, Russia IS interested in Gabon, Oman, Indonesia, and the South China Sea.

    Note that 2/3 of Harvest Board members and top management have worked actively in Russia at some point in their careers. One Board member is Russian.

    In fact, this may be the key to what happens with the share price - despite the Shorts asserting themselves loudly - over the next few days.

    If word comes that top managers are either in Russia or negotiating with the Russians from Houston or Venezuela, I think current Longs - the stock is almost entirely Institutional, with virtually no Retail involvement - will stabilize very quickly and move up again.

    Of course, they may also still be renegotiating with Pertamina or in deal talks with ONGC or one of the other Indians, which are especially interested in the Gabon properties. And now that Eni has moved into Venezuela pretty heavily, it might want to take out Petrodelta as well.

  • Report this Comment On March 21, 2013, at 8:09 AM, EllenBrandtPhD wrote:

    Here is Patrick Murray's bio from the Harvest website. As chair of the Audit Committee, Mr. Murray has the most to lose, in a sense, if this situation is not resolved quickly and to the benefit of all shareholders.

    He has a stellar reputation in Texas and in the US petroleum industry, and is also a very big HNR shareholder. If Stephen Haynes does not want to talk to the world yet, let Patrick Murray do so - and fast, because the Shorter Distorters are wallowing in distortion like piggies in mud.

    On the bright side, if there is one, volumes have been so heavy that a lot of the "situational dump" of shares into inventory must have been picked up by now, either by Shorts or by newcomers who specialize in stocks under pressure.

    Remember, very similar trading patterns occurred recently in MMR and FSIN - both of which situations were similar, and both of which turned out very OK for the Longs who bought even in the middle, let alone the bottom.

    And rhetoric in the Venezuelan pre-election buildup is now absolutely over the top on both sides. It's beginning to look like the Bay of Pigs - I kid you not. Who knew we were going back to 1962?

    In any case, Mr. Murray's bio:

    Patrick M. Murray

    In 2007, Mr. Murray retired from Dresser, Inc. He had been the Chairman of the Board and Chief Executive Officer since 2004. Dresser, Inc. is an energy infrastructure and oilfield products and services company. From 2000 until becoming Chairman of the Board, Mr. Murray served as President and Chief Executive Officer of Dresser, Inc.

    Mr. Murray was President of Halliburton Company's Dresser Equipment Group, Inc.; Vice President, Strategic Initiatives of Dresser Industries, Inc.; and Vice President, Operations of Dresser, Inc. from 1996 to 2000. Mr. Murray has also served as the President of Sperry-Sun Drilling Services from 1988 through 1996. Mr. Murray joined NL Industries in 1973 as a Systems Application Consultant and served in a variety of increasingly senior management positions.

    Mr. Murray currently serves on the board of Precision Drilling Corporation, a publicly held contract drilling company. Mr. Murray is also on the board of the World Affairs Council of Dallas Fort Worth. He is on the board of advisors for the Maguire Energy Institute at the Edwin L. Cox School of Business, Southern Methodist University, and a member of the Board of Regents of Seton Hall University. Mr. Murray holds a B.S. degree in Accounting and a Master of Business Administration from Seton Hall University. He served for two years in the U.S. Army as a commissioned officer.

  • Report this Comment On March 22, 2013, at 7:01 AM, EllenBrandtPhD wrote:

    Several sites are wondering if this little Bloomie's story might be one of the reasons Harvest is staging a comeback:

    http://www.bloomberg.com/news/2013-03-18/tnk-bp-billionaires...

    It certainly is a big Hmmmmmmmm???

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