Last week, we were reminded of the impact of short sellers on the market.
Short sellers are investors who bet that certain stocks will fall in price. Basically, they borrow and then sell shares of the stock they expect to fall.
When the price does drop, they buy shares at the lower price to pay off the debt, making a profit on the difference.
Sometimes, a short seller will speak up about his or her expectations for a drop in price and it becomes a self-fulfilling prophecy: the comments themselves send the stock lower.
Hedge fund manager David Einhorn has become famous for his ability to move a stock lower with critical comments about companies he’s shorting. You probably recall the firestorm he created two years ago around The St. Joe Co. at an annual conference called the Value Investing Congress, when he said the company’s land holdings were overvalued.
That started a chain of events in which St. Joe’s largest shareholder, Bruce Berkowitz, supported the stock and eventually pushed out St. Joe’s management team.
Berkowitz also has a strong reputation as a fund manager, so the battle with Einhorn over St. Joe drew national attention. The New York Post dubbed it “the clash of the financial titans.”
That clash really hasn’t been settled, and it will probably be years before we know the true value of St. Joe’s land holdings.
So Einhorn seized the opportunity at this year’s Value Investing Congress to continue trashing St. Joe.
According to blog postings by Wall Street Journal reporter David Benoit, Einhorn took up St. Joe during the question-and-answer period.
“Einhorn asked about St. Joe’s (sic) and gets excited. He says they had a (conference) call and practically no one listened,” Benoit wrote on his blog.
“Nothing is going on at that company,” Einhorn said, according to the blog.
Einhorn also said that St. Joe still is overvalued, trading at two to three times the value of its land, Benoit wrote.
Most people at the conference were waiting to see what new company Einhorn would target, since it’s apparently become an annual ritual at this event.
According to multiple news reports, he picked on restaurant chain Chipotle Mexican Grill Inc., which he said is facing new competition from Taco Bell.
Chipotle’s pricey stock fell as much as $25.98 to $290.15 Tuesday after Einhorn’s talk, an 8 percent drop. Einhorn’s power appears unchanged.
PSS also targeted by shorts
While Einhorn has a high profile, PSS World Medical Inc. was targeted last week by an investment website that may be less known, but still has an impact.
A lengthy story posted by The Street Sweeper (thestreetsweeper.org) called PSS “a shopaholic with more than 100 acquired companies under its belt and a recurring need to reinvent itself to try to keep up with the competition.”
The story also said a forensic accountant “pointed out some scars in its finances.”
The website, which says at the top of its main page that “we uncover the dirty little secrets that investors need to know,” did disclose that its owners have a short position in PSS stock.
PSS’ stock dropped almost immediately after the story was posted a little after 1 p.m. Wednesday, falling as low as $21.27. But it rebounded very quickly and closed Wednesday at $22.81, just 19 cents lower than Tuesday’s close. By Thursday’s close, it was back to $23.12, higher than it was before the Street Sweeper report.
Here’s what investing website Seeking Alpha had to say about the rapid drop and rebound in the stock:
“It appears that investors read the piece and realized that far from being news, the Street Sweeper article was essentially a hit piece, using anecdotes, scare tactics, and insinuation to make a short case for a stock in which the site’s owners — to their credit — disclosed they have a large short position.”
RailAmerica buyout completed
Genesee & Wyoming Inc. last Monday completed its $1.4 billion buyout of Jacksonville-based RailAmerica Inc.
Although Connecticut-based Genesee officially owns RailAmerica, the merger of the two short-line railroad operators is still awaiting approval from the U.S. Surface Transportation Board. That approval may come before the end of this year but possibly not until early 2013, Genesee said.
Until it receives that approval, control of RailAmerica’s railroads has been placed into a voting trust.
Genesee operates 66 short-line railroads and RailAmerica has 45.
Spinoff stocks begin trading
Two notable spinoffs were completed last week and the new stocks began trading Tuesday.
ADT Corp. was spun off from Tyco International Ltd., with Tyco stockholders receiving one ADT share for every two Tyco shares they own.
ADT’s stock, which trades under the ticker “ADT,” opened at $37.18 Tuesday and closed at $38.33 on its first day of trading.
The Boca Raton-based security services company has a major presence in Jacksonville, where it employs about 2,000 people.
On the same day that ADT was spun off, Kraft Foods Inc. completed its division into two separate companies. Officially, Kraft Foods Group Inc. was spun off as a separate company, with stockholders receiving one Kraft Foods Group share for every three shares of the combined company they had.
Kraft Foods Group consists of the company’s North American grocery business, which includes its Maxwell House coffee plant in Jacksonville that employs 235 people.
The other half of the split is Kraft’s former global snacks business, which was renamed Mondelez International Inc.
Kraft Foods Group, which trades under the ticker “KRFT,” opened at $44.45 Tuesday and closed at $45.42 on its first day.
Mondelez, which trades under “MDLZ,” is actually the former Kraft Foods Inc. stock with the grocery business separated.
After the stock had closed at $42.52 Monday before the spinoff, Mondelez opened at $28.42 Tuesday morning after the spinoff and fell to $28.01 by Tuesday’s close.
Morningstar analyst Erin Lash said in a report about the two companies that there is a clear difference between them, from an investing point of view.
“We think investors looking for sweeter growth prospects from a packaged food firm may want to consider the Mondelez global snacks business, while income investors will likely find the new Kraft Foods shares appetizing because paying a top-tier dividend is to be the firm’s main use of cash,” she said.
EverBank completes purchase of GE unit
Oct. 1 marked the completion of a lot of deals. Jacksonville-based EverBank Financial Corp. completed its acquisition of Business Property Lending Inc., a unit of GE Capital Real Estate.
The company originates and services commercial real estate loans on properties leased by small and midsized businesses. It will be called EverBank Business Property Lending Inc.
The final purchase price for the deal, originally announced in July at $2.51 billion, was $2.41 billion.
Mixed views on FIS
Last week brought mixed reviews for Jacksonville-based Fidelity National Information Services Inc., or FIS.
Credit Suisse analyst James Kissane last week lowered his rating on FIS from “neutral” to “underperform,” but Robert W. Baird analyst David Koning upgraded the company from “neutral” to “outperform.”
Kissane said in a research note that his downgrade was due to a new rating system at Credit Suisse in which the “ratings now reflect an expectation of relative out/under performance versus an analyst’s coverage universe.”
“To be clear, at current valuation levels we see little downside risk to the shares,” he said.
But he added that because of “anemic growth prospects” and the pending loss of a large customer, “we think the stock is likely to underperform relative to our overall coverage universe over the intermediate term.”
Koning’s new rating reverses his downgrade of the stock three months ago.
“Since we downgraded in mid-July, the stock has underperformed the S&P by about 17 percent and we believe that the handful of concerns we had at the time are now fully factored into the stock, creating an attractive entry point,” Koning said in his research note.
Meanwhile, D.A. Davidson analyst John Kraft last week reiterated his “buy” rating on FIS. He said companies like FIS which provide processing solutions for financial institutions are offering services that banks need.
“While 2012 is likely to remain challenging, we are excited about FIS as the company’s revenues are largely recurring and mission critical,” Kraft said in his report.
Stein Mart sales up again
Stein Mart Inc. continued to report improved sales in September.
Total sales for the five weeks ended Sept. 29 rose 3.9 percent to $102.7 million and comparable store sales rose 2.4 percent.
Comparable-store sales are sales at stores open more than one year and are a key indicator of a retailer’s performance.
Jacksonville-based Stein Mart had 262 stores operating across the country at the end of September, one more than it had a year earlier.
In the first eight months of its fiscal year, Stein Mart’s total sales are up 2 percent to $761.5 million and comparable store sales are higher by 1.3 percent.
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