Why P.T. Barnum Would Love CellNet Investors
Are investors being fooled again? That's what one smart investor who specializes in the bonds of troubled companies was whispering to me yesterday about
CellNet Data Systems
(CNDS)
, whose stock rose 19% after the company's subsidiary,
CellNet Funding
(CNDSP)
, announced that it will make a dividend payment on its preferred securities. This same source was among those whose wisdom I tapped for info on the likes of
Boston Chicken
(BOSTQ)
,
Discovery Zone
(DVZNE)
and even
Just for Feet
undefined
after they had hit the skids.
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CellNet Data, a provider of telemetry services, recently warned that it's having trouble raising much-needed cash and if it continues to have trouble, existing shareholders could find their investment diluted.
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Message Boards.
But now, with this payment, some investors must be thinking the company is healthier than it's letting on. Unfortunately, according to a company spokesman, this was a regularly scheduled payment on the preferred out of an escrow account. "And people misunderstood it as a sign of health," our source says.
The real sign of health, or lack thereof, can be seen in CellNet Data's bonds, which are trading at 6 cents on the dollar, and the subsidiary's preferred stock, which has a face value of $25 per share, but is trading at 5 3/16. Yet CellNet Data still has a market value of $99.7 million. "That's laughable," he says. "I call this the smart money vs. the foolish money. They just don't understand. But when you've gone through a couple of these, it's always the same."
Yep, investors thinking they've found a bargain. For more info on what could happen, check out yesterday's
extra on Just for Feet.
And this column's Bomb of the Year award goes to:
An item
here in June started, "For those of you wondering if I have it in my heart to ever write anything remotely positive..." I went on to report how one of my sources, Ken Londoner of
Red Coat Capital
, liked
U.S. Franchise Systems
(USFS)
, a hotel franchising company. Londoner is a longtime tracker of the lodging industry, and he rarely goes on the record. So, here he was, willing to go on the record, and he had several compelling reasons he thought the company was attractive: a strong balance sheet, good management and lots of smart investors who already owned the stock.
But the column also questioned whether the USFS story was too good to be true and raised a few red flags of its own. And when I asked CFO Neal Aronson about risk, he responded, "Our risk is timing."
How prescient. Turns out the hotel industry has gone into a deep slump, and earlier this week, USFS warned that its biz may not be as bright as earlier expected. The news caused USFS' stock to lose 60% of its value; it closed yesterday at 5 1/8. (It was 18 1/4 when first mentioned here.)
Londoner, meanwhile, continues to be impressed by USFS' business model, which throws off large amounts of cash flow. But now he says, "Perhaps it would be more intelligent for them to be operating in the confines of a larger organization."
Wishful thinking?
Ancor's away:
Hostile React-O-Meter working overtime on
Ancor Communications
(ANCR)
, which has added almost $500 million in market value since its fundamentals were first questioned
here. Ditto for
Diamond Technology Partners
(DTPI)
, which has grown by 200%. Emailers wanna know why I don't just write that my sources were wrong.
Because I try not to confuse the momentum of a stock with the fundamentals of a company. (Doesn't the momentum in some of these stocks, and the lack of worry about fundamentals, remind you of this time last year? So many of last year's autumn stars were among this year's biggest has-beens.)
Pinnacle of its success:
An item
here yesterday mentioned a number of "unadulterated disasters" that were good calls by short-seller Marc Cohodes of
Rocker Partners
. As some of you pointed out, some of those companies finally got their act together and soared, among them,
C-Cube Microsystems
,
Macromedia
(MACR)
and
Pinnacle Systems
(PCLE)
. All three got pummeled because of botched biz plans (go back and look at the charts and earnings), and all have subsequently done much better.
Does that mean the shorts were wrong? Hardly. The operative phrase in the column was "at one time or another." Those companies
did
fall on hard times -- and they recovered. Some companies (even tech companies) are like cats: They eventually land on their feet, though most don't have nine lives.
More Gap gossip:
An item
here yesterday mentioned how my wife couldn't find turtlenecks, a staple winter item, at
Gap
recently.
R.C.
from Westport, Conn., a former buyer at
Saks Fifth Avenue
(SKS)
, tells a similar story:
I have been shocked every time recently that I've gone into my Gap store in my town for my kids. I went in a few days before Columbus Day weekend looking for sweat pants, and there were NONE! They said they had been promised sweats for a long time and didn't get them. The store was EMPTY! So, of course, we had to go elsewhere. I said to my husband that I was glad we didn't own any Gap, because they truly had problems. (The old Peter Lynch method of picking stocks.)
Yep, gotta hand it to PL. Sometimes his strategy of buying, selling or staying away from what you know really
does
work!
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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.
