Why One Fund Manager Is Shorting AT&T - TheStreet

Why One Fund Manager Is Shorting AT&T

Also, Amazon antics, a Lernahooligan alert, more bad news at Open Text and another chapter in the CHS saga.
Publish date:

Friday Follies

Talking T:



(T) - Get Report

ultimately blows up as an investment, it won't be a surprise to Don Luskin. Luskin manages


, a mutual fund that lists on its Web site the daily performance of stocks in its portfolio. A few weeks ago, he publicly stated why his fund is short the telephone giant (not something you see from most mutual funds, which generally won't say anything negative about a company, let alone say why they're selling a company short -- if indeed they sell short).

Among his gripes, which he lays out in his report: AT&T "struggles desperately to preserve and propagate its obsolete technologies and obsolete business models, using its enormous cash resources (which it should return to its dividend-loving shareholders) to gobble up other telecommunications companies (which should have stayed independent or found a more strategically relevant acquirer)."

More specifically, he's concerned AT&T is in the wrong place at the wrong time. At a time when data traffic is exploding and voice traffic is stagnant, AT&T's network is optimized for long-distance voice. Even its "aggressive acquisitions of cable companies





are oriented toward voice," he says.

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He's also concerned about the centralized structure of AT&T's network. "Just as the power of market economics rendered obsolete the central control regimes of the Communist empire, so has today's hyper-competitive telecom market rendered obsolete the notion that an omnipotent centralized network can control the functions available to its users," he says. "AT&T's 20,000 fiber route-miles are ancient and obsolete. New competitors with no legacy systems to protect -- and efficient new rights of way -- have been free to lay thousands of route-miles of state-of-the-art fiber, conveying unbeatable cost advantages over AT&T."

Finally, at a time when wireless services are still using old technology, "AT&T wireless service will thus always be voice-oriented, lower quality and require more power from handheld devices. And although the company claims 23% annual growth in wireless subscribers, it still trails the 56% rise in overall wireless subscribers."

AT&T declined comment on Luskin's report.

Oh, and if you're considering shorting AT&T, this warning: Luskin isn't a trader; he's in it for the long haul.

Speaking of trades vs. investments:

Plenty of emailers wondering why I should be giving kudos to Jeff Matthews' piece

here several months ago which raised questions about


(AMZN) - Get Report

. They point out that the stock was much lower at the time (about 59, compared to 71 now), and that anybody trying to trade off of Matthews' piece, or short the stock, would've been clobbered.

To which I say, go back and re-read the piece. It said nothing about Amazon's stock. It was about Amazon's biz. What the stock did between then and now was rise on nothing but typical Wall Street gibberish -- not fundamentals. As it turns out, Matthews was dead-on with the fundamentals, and if the fundamentals don't improve soon the stock will trade lower.

Best of luck to anybody who can time when


will happen. That's not investing -- it's



Lernahooligan alert:

Have to hand it to

Lernout & Hauspie


, the Belgian voice-recognition company. It reported a strong quarter the other day. It also saw its days outstanding of receivables balloon to 127 days, or more than four months, from 104 days. Longtime bull Donald Newman of

Ladenburg Thalman

, still a fan of the company, said the higher receivables "are a deterrent for any new investment" in the company.

Longtime L&H short-seller Marc Cohodes of

Rocker Partners

says the skyrocketing receivables number is a sign the company is loading the distribution channel with too much inventory to make its numbers. And when that happens, he says, "It's party over, game over

because this isn't a receivables business. This is a translation business. A licensing business. Customers should be paying on time. And we all know that nonenterprise software companies don't have receivables at this level." (They weren't even that high at

Network Associates



Engineering Animation


, which both blew up.)

Cohodes' analysis is that if Lernout's receivables had stayed at 104 days instead shooting up to 127, the company probably would've only booked revs in the mid-$60 million range. "The 'created' revenue of $23 million," he says, "carries a 72.5% gross margin and therefore added about $16.7 million to that account. This coincidentally equals

nearly the entire operating income reported this quarter."

In other words, if L&H "had reported its revenues more consistently with its past," he says, "it would have missed revenues enormously and would have broke even, at best."

L&H officials didn't return this column's calls seeking comment.

Closed book on Open Text, epilogue:

Stock continues to slide. Late yesterday,

Open Text

(OTEX) - Get Report

reported the company reported income from operations of $26,000, a far cry from analyst estimates of more than $1 mil. And its CFO is quitting. And receivables days outstanding jumped to 129 days from 99. No happy ending there.

Finally, the CHS saga continues:

Forgot to tell ya, if ya already haven't seen --

CHS Electronics


placed one of its three U.K. subsidiaries in receivership, and its German and Austrian operations have filed for bankruptcy reorg. Think the hubris of CEO Claudio Osorio has been humbled yet?

Herb Greenberg writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, though he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. He welcomes your feedback at

herb@thestreet.com. Greenberg also writes a monthly column for Fortune.

Mark Martinez assisted with the reporting of this column.