Zanett's Stock Refuses to Die

NEW YORK ( TheStreet) -- Zanett ( ZANE) has become a hot topic in the world of small-cap traders, as the stock's 1,000% surge this month has baffled those who refuse to call the IT solutions company a comeback king.

Zanett made headlines on March 3 when it acknowledged it would receive a second delisting notice from the Nasdaq after it failed to meet the exchange's minimum bid price requirement before the March 15 deadline.

One day later, Zanett announced the closing of over $12 million in new business during the first two months of 2010, which have sent shares up tenfold from 30 cents.

That jump in share price has brought out skeptics who are attempting to poke holes in the company's survival story. Although Zanett's stock continues to fly high, short traders argue that with a tiny amount of cash on hand and diminishing revenue, Zanett's fundamentals are poor and shouldn't support this type of rally.

A key argument in favor of short traders is that Zanett's stock has been in a downtrend for years. Shares traded above $260 on a split-adjusted basis in June 1996. Since then, though, the stock has lost nearly 99% of its value, even when taking the recent jump in share price into account.

One of the other major criticisms leveled against Zanett is that the company had only $87,602 in cash equivalents at the end of the quarter ended Sept. 30, 2009, which is down sharply from a balance of $450,304 as of Dec. 31, 2008. As one Zanett short trader joked on Twitter, "My Ameritrade trading account has more cash then they do."

Zanett's small cash level is made to look more miniscule by the $13 million in debt the company is carrying.

Detractors will also point out that Zanett saw revenue fall 22% in the same quarter to $9.9 million, which the company blamed on the weak economy and decreased demand in the IT industry.

Of course, Zanett's management is more upbeat about the company's prospects. When announcing the $12 million in new business in 2010, Zanett's management said that, at this rate, the first quarter will easily overtake the fourth quarter, when $13.7 million in contracts closed.

"All I can say is... Business is booming!" Zanett President Dennis Harkins said in a statement. "Here at Zanett, we have 21 great people in our national salesforce, and we are currently accelerating full speed ahead, firing on all 12 cylinders."

Both Harkins and Zanett CEO Claudio Guazzoni were not available to speak to TheStreet for this story, a company spokesman said.

Despite the cheerful tone of Harkins' comments, not all are convinced, including Cody Blinn, a trader who posts his trades on Twitter. Blinn says he fails to see how $12 million in new contracts signed in past two months can warrant this dramatic run in the stock, considering $13.7 million in the fourth quarter "had very little and temporary effect on stock price."

"It may be true that Zanett's business has been improving, but definitely not in the pace and scale that is represented by the recent move in stock price," he adds. Blinn currently has no position in Zanett, but has sold short the stock recently.

Blinn says that investors looking to chase stocks like Zanett need to learn that while press releases can sound promising, they should not get easily carried away with the news.

"Traders must realize that not many serious investors will invest in a stock that is already up so much so fast on less-than-spectacular news," he says. "The stock is trading here mostly due to momentum and once profit taking starts it will be hard to find real buyers at these levels. That will mean a big drop for the stock until it finds a fair value."

Another topic for scrutiny is that Zanett's biggest creditor is related to the company's CEO, and the maturity date on loans has already come and gone.

Zanett has a combined promissory note for $4.57 million with a maturity date that passed on Monday, the same day the company expected to receive a delisting notice. Zanett entered into the note with Bruno Guazzoni, the owner of roughly 27% of Zanett's outstanding common stock and the uncle of CEO Claudio Guazzoni, as noted short seller Timothy Sykes pointed out last week.

On the bright side, it does appear that Zanett will regain compliance with the Nasdaq's listing requirements. On Wednesday, Zanett said it received a second notice from the exchange, which said the company will be provided with an additional 180 calendar days to regain compliance with the minimum closing bid price rule.

Zanett now has until Sept. 13 to regain compliance, which would occur after the stock finishes at or above $1 for 10 consecutive trading sessions. Wednesday marked the tenth consecutive close above $1, although the Nasdaq could require Zanett to maintain the $1 closing price for a period in excess of ten sessions. Zanett said it wouldn't expect that to be stretched longer than 20 consecutive business days.

While Zanett could regain compliance relatively soon, it will still not be enough to convince skeptics. Short traders like Blinn still have a hard time calling Zanett a great comeback story, as it is impossible to ignore the company's small cash position, the delisting warning, and the loan maturity dates.

"In the end, the picture I see looks more like overextended and unjustified momentum than a turnaround story," he says. "I think we have seen this scenario too many times in the past and Zanett gives me no reason to believe it will be different this time."

-- Written by Robert Holmes in Boston.

Follow Robert Holmes on Twitter and become a fan of TheStreet.com on Facebook.

More from Technology

3 Must Reads on the Market From TheStreet's Top Columnists

3 Must Reads on the Market From TheStreet's Top Columnists

Jim Cramer: Okta Is a Very Expensive Stock

Jim Cramer: Okta Is a Very Expensive Stock

Here's Why Tesla's Solar Shakeup Makes Sense

Here's Why Tesla's Solar Shakeup Makes Sense

BlackBerry CEO: Stock Price Should Be Higher, We Are Looking at M&A

BlackBerry CEO: Stock Price Should Be Higher, We Are Looking at M&A

What Internet Sales Tax Ruling? Amazon Still Headed to $1,850

What Internet Sales Tax Ruling? Amazon Still Headed to $1,850