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Getting Into Stock Shape With Bally

Two shareholders are now tied as the top holders of this stock, upping the pressure on management.

This alert was originally sent to subscribers of TheStreet.com's Stocks Under 10 on Monday, Sept. 12 at 10:17 a.m. EDT, and is being reprinted here as a special bonus for TheStreet.com readers. The Stocks Under $10 Staff is Will Gabrielski and David Peltier.

The positioning for control of

Bally Total Fitness

(BFT:NYSE) escalated last Thursday when investment firm Pardus Capital announced that its stake in the company has increased to about 12%, vs. the 6.4% Pardus reported just last Tuesday. We aren't taking any action in this note, but want to look deeper into this development.

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We believe the recent surge in Bally's share price, which allowed us to lock in a 24% gain in 300 of our 1,000 shares last Tuesday, has been supported at least in part by Pardus' additional buying. This increased stake, coupled with Bally's announcement last week confirming that it now has until Nov. 30 to file its long-overdue financial statements with the Securities and Exchange Commission before facing default on its outstanding debt, will likely support the stock at its recent quote of $3.96.

Even more interesting is that Pardus' increased stake has moved it up the list of top shareholders into a tie at the top with activist investor Emanuel Pearlman of the Liberation fund. With so much of Bally's equity now concentrated between just two shareholders, we believe Bally will face more pressure to raise cash through asset sales and get its accounting in order, or sell the company.

Our internal model for Bally, based on our projection for the company's 2004 EBITDA results and conservative assumptions for a multiple based on a recent deal done in the industry, yields a share price of about $8 for Bally now, and we believe the filing of financial statements will help other investors reach the same conclusion.

We will wait for a 10% drop in the stock from the current quote before adding to our stake, though, because we don't want to be buyers this far above our $3.35 cost basis given the downside risk if Bally fails to deliver financial statements.

The Stocks Under $10 Staff is Will Gabrielski and David Peltier.

David Peltier is a research associate at TheStreet.com In keeping with TSC's editorial policy, he doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Peltier appreciates your feedback;

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William Gabrielski is a research associate at TheStreet.com and is accredited with a Series 7 license. In keeping with TSC's editorial policy, he doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Gabrielski welcomes your feedback;

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to send him an email.