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Zanett's Stock Refuses to Die

Stocks in this article: ZANE

NEW YORK ( TheStreet) -- Zanett (ZANE) has become a hot topic in the world of small-cap traders, as the stock's 1,000% surge this month has baffled those who refuse to call the IT solutions company a comeback king.

Zanett made headlines on March 3 when it acknowledged it would receive a second delisting notice from the Nasdaq after it failed to meet the exchange's minimum bid price requirement before the March 15 deadline.

One day later, Zanett announced the closing of over $12 million in new business during the first two months of 2010, which have sent shares up tenfold from 30 cents.

That jump in share price has brought out skeptics who are attempting to poke holes in the company's survival story. Although Zanett's stock continues to fly high, short traders argue that with a tiny amount of cash on hand and diminishing revenue, Zanett's fundamentals are poor and shouldn't support this type of rally.

A key argument in favor of short traders is that Zanett's stock has been in a downtrend for years. Shares traded above $260 on a split-adjusted basis in June 1996. Since then, though, the stock has lost nearly 99% of its value, even when taking the recent jump in share price into account.

One of the other major criticisms leveled against Zanett is that the company had only $87,602 in cash equivalents at the end of the quarter ended Sept. 30, 2009, which is down sharply from a balance of $450,304 as of Dec. 31, 2008. As one Zanett short trader joked on Twitter, "My Ameritrade trading account has more cash then they do."

Zanett's small cash level is made to look more miniscule by the $13 million in debt the company is carrying.

Detractors will also point out that Zanett saw revenue fall 22% in the same quarter to $9.9 million, which the company blamed on the weak economy and decreased demand in the IT industry.

Of course, Zanett's management is more upbeat about the company's prospects. When announcing the $12 million in new business in 2010, Zanett's management said that, at this rate, the first quarter will easily overtake the fourth quarter, when $13.7 million in contracts closed.

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