Updated from 9:53 a.m. EST
Investors betting on a rebound at
forged ahead Tuesday, despite news that government regulators are informally investigating the company.
Shares of the ailing teen-clothing chain were recently up 15 cents, or 6.8%, to $2.37, reversing a 23% premarket slide after the company announced the
Securities and Exchange Commission
launched a probe of second-quarter earnings results from 2004.
The shift back into positive territory is a testament not only to the volatility of the stock, but also to the blind faith that some investors have in the underlying value of the company, based on financial support coming from a giant hedge fund, Steve Cohen's S.A.C. Capital Management.
"If you're not S.A.C., and you're an equity investor here, you're just flying blind here," said Kevin Starke, an analyst with Imperial Capital LLC. "The problem for anyone else involved in the situation is that we don't have the access to the financials that S.A.C. has, so we don't know what the relative value of all these moving parts are."
Shares of Wet Seal have added 50% since S.A.C.'s $40 million investment in the company rescued it from the threat of bankruptcy in November. Those gains come despite a 77% collapse in the stock price for all of 2004, thanks to spiraling sales after the brand fell out of favor with finicky teen shoppers.
Regulators also have requested documents related to the recent sale of the company's stock by
, a Canadian lingerie retailer whose chairman and chief executive, Irv Teitelbaum, stepped down as Wet Seal's chairman in August. La Senza announced in July that it would sell its 3.1 million shares of Wet Seal.
This development followed a filing to the SEC last week that disclosed a class-action suit brought against Wet Seal in the U.S. District Court for the Central District of California. The complaint alleges the company violated federal securities laws by misleading investors about its prospects for stemming losses and returning to profitability after its disastrous year.
The complaint in the California court also alleges that La Senza sold its stake in Wet Seal using insider information.
"La Senza is really being investigated here, not Wet Seal," Starke said (he does not own shares in Wet Seal, and his firm has no banking relationship with the company). "Chances that Wet Seal is in any significant trouble is actually pretty small.
"The valuation case can't be that affected by an SEC probe," he added. "How much can you fine a company like this? It's like drawing blood from a stone. This is the least of their worries, frankly."
Wet Seal said the SEC inquiry concerns the chronology, events and announcements in the period of Aug. 5-19. The company posted a $102.8 million quarterly loss on Aug. 19. In December it announced plans to close 150 underperforming stores and lay off 2,000 employees.
In July, S.A.C. disclosed a 6.4% stake in the company, giving rise to turnaround predictions. In November, the company said it got another $40 million from S.A.C. to keep the chain alive.
Some observers consider Cohen's continued interest in the retailer an attempt to salvage a sour investment. Analysts have speculated that any turnaround at Wet Seal probably would be centered around its more successful Arden B. concept, which boasts double-digit revenue gains.
"S.A.C. has a lot of money sunk into this thing," Starke said. "They figure there is going to be real value here, particularly in the Arden B. franchise, as long as the company can be given the liquidity it needed to shut down underperforming Wet Seal stores, build out the Arden B. stores, and maybe turn some Wet Seal stores into Arden B. stores."