Short-sellers, like expert poker players, look for "tells," little signals about a company's past that increase their conviction that a company's in for a fall.
In the case of
, which is coming up for
Food and Drug Administration
panel review of its farsightedness laser, the tells are virtually screaming.
The company's pedigree is lousy. It was brought public by
Thomas James Associates
in 1989. In 1990, in order to settle a suit by the
Securities and Exchange Commission
, a federal judge ordered Thomas James, its former president and a director, to pay $1.5 million for "fraudulent and high-pressure sales tactics" in conjunction with four initial public offerings, including Sunrise. The firm is now defunct. That's a tell: Few good companies get taken public by bad underwriters.
There are other unpleasant associates of company. A person named Donald S. Chapman has invested in Sunrise, according to SEC documents. Short-sellers believe he is the same former broker who was heavily involved in the promotion of
. Presstek, a printing company that briefly meteored in 1996 from under 2 a share to around 200, now trades at around 7 a share after a two-for-one split. Short-sellers consider Chapman promotional. Efforts to reach Chapman were unsuccessful.
Another tell is that the operating history of the company is ugly. In February 1996, an FDA panel rejected one of the company's lasers for dental surgery due to concerns about safety. The stock got shellacked, subsequently hit a low of 75 cents a share in February 1997, according to data-tracker
, went to the over-the-counter bulletin board and is now out of the dental laser business. Sunrise almost set that year, according to its auditor of the time,
Ernst and Young
, which sent it a letter doubting that it could continue as a going concern.
Sunrise spokesman Ed Coghlan dismisses all this as ancient news: "This has nothing to do with the current management of the company. So what does that matter? It doesn't matter what the roots of the company are. The company has reinvented itself rather expertly. What's relevant is how the company is performing in the area of refractive surgery."
True, Sunrise has battled back, but not because of any sales success. Despite having marketed its farsightedness lasers overseas since December 1993, Sunrise only had sales of $13,000 in the most recent quarter and a loss of $8.5 million.
And there you have another tell. Short-sellers look for companies that tell stories about products that will somehow find stardom in the U.S, despite not selling elsewhere. Coghlan says that's not relevant. "We are not selling the technology overseas and haven't for over a year." Why? "Because it's so hard to make money overseas. The company's revenue will come primarily from the U.S. This is what the company says every time the question is raised."
If the company's farsightedness laser is approved and manages to be a big hit in U.S., the company's past will no longer be an issue. But if not, then the tells would have told all.