A good read, and perspective on RS and what has happened after.... just a perspective!
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 company’s 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 company’s shares will trade in the $5 to $7 range. That’s 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. That’s 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 don’t take a company’s shares above $5 may be difficult to short, because it’s 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 -- don’t 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 Palm’s conversion of 20 shares into one share.
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 company’s 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 company’s shares will trade in the $5 to $7 range. That’s 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. That’s 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 don’t take a company’s shares above $5 may be difficult to short, because it’s 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 -- don’t 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 Palm’s conversion of 20 shares into one share.
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