The NY Post had a great piece today, by none other than Roddy Boyd, which advanced a fundamental pillar of short seller misinformation: Just run your company profitably, and that will take care of the bad guys.
Roddy completely ignores that his own article proves that isn’t the case. How do I know?
In it, he focuses on a company I am intimately familiar with – NFI.
Here some samples of Mr. Boyd’s work, and my comments:
“SHORT-SELLERS ARE BURNED BY NOVASTAR
By RODDY BOYD
April 16, 2006 -- One Midwestern financial company, long a target of short-sellers, has deployed an infrequently used tactic to inflict pain on its naysayers: Its management has put in place a strategy that consistently makes money.
The stock of Novastar Financial, a Kansas City, Mo.-based home-equity real estate investment trust, has been a battleground between long-term holders in love with its juicy dividends and short-sellers who suspect that the company has massive default risk with those loans.”
Yes, and the shorts are still planting stories to argue that massive defaults will crush the company – after being wrong about that for 4 years now. Even as interest rates have climbed, which according the short sellers and their crony journalists would trigger this massive default, the company’s defaults still are about the lowest in the industry, and further, are well below even what the company predicted – people aren’t defaulting on their loans in the market segment that NFI plays in – the shorts have just been plain wrong about that since July 2002. So this “suspicion” has been shown to be 100% wrong for 4 years, and yet it still gets mentioned ominously by the third sentence of Roddy’s article, followed by the tale of an unrelated company (so the reader can consider these now-long-incorrect theories anew – guilt by association being a favorite short selling tactic, if you can’t attack the actual company – attack a different company that is somewhat like the one you are short):
“With the history of sub-prime mortgage lenders being rife with accounting chicanery and hidden credit risk - the December 2002 collapse of Conseco was the third largest bankruptcy in U.S. history, at the time - those shorting Novastar maintained that the company is no different.
Meanwhile, Novastar bulls argue that the company is indeed different. The bulls say the company's risk management is state-of-the-art and that the management, led by CEO Scott F. Hartman, is the best in the industry.
While Novastar has fired back at its critics - it hired former Clinton White House damage-control expert Lanny Davis in 2004 to blast back at MarketWatch columnist Herb Greenberg - it has stayed away from weaving elaborate conspiracies or using the courts.”
It isn’t the bulls saying that, Roddy. History has shown it. Just look at the numbers. The shorts called this wrong, and once they were in too deep, pulled every dirty trick in the book to cut the stock’s price out from under it, in the hottest housing market in history, at a time when the company was doubling its earnings (they actually more than quadrupled since the shorts started their erroneous bet).
And actually, Lanny was hired to respond to the frivolous class action suit brought by Milberg Weiss (based on a now provably flawed and vicious hatchet job in the C section of the WSJ, whose editor is a Thestreet.com alumnus), and happened to catch Herb lying in one of his headlines as the company’s stock was given a 70% haircut. Lanny forced Herb to correct the lie. That is what actually happened. Herb lied, claiming that NFI’s mortgage insurance provider was suing NFI (NFI actually had sued their insurance provider), and Lanny made him tell the truth and correct the headline. Simple.
Note that Roddy, a "pro" writer, gets his tenses mixed up here – or perhaps it is Freudian? He uses the past tense “maintained” and the switches to the present tense, “the company IS no different” – leaving the reader with the impression that the shorts still maintain that NFI is another fraud – even after 4 years of being proven wrong in this specious and frivolous assertion.
Sometimes it’s the little things.
The article continues to note that NFI has consistently generated a profit, and that it is rough shorting it.
It then goes on to take a silly and frivolous slam at OSTK and Biovail, positioning their suits against short sellers and research firms accused of front-running doctored research reports and colluding with journalists to impact the price of their stock, as launching an effort to “strike back at short-sellers.”
Wrong. They are suing because they allege illegal front-running of hatchet jobs, and claim there is a network of complicit journalists involved – Roddy being one of the ones apparently being investigated for something along those lines by the SEC, along with longtime NFI bear Herb Greenberg, Liz McDonald of Forbes (who also coincidentally has written negatively about NFI), Cramer (who has bashed NFI on his radio and TV shows), Jesse Eisinger (who has been involved in trying to unmask the Easter Bunny, using stolen bank records and cell bills), and a who’s who of others.
Herb wrote 32 negative articles on NFI in just one 12 month period, often claiming that rising defaults and management inadequacies would result in the company being crushed – all of which were wrong, and many of which appear to have been front-run, per this analysis.
Anyway, here is where Roddy goes after OSTK and Biovail:
“In contrast, money-losing Internet retailer Overstock.com and Biovail, a Canadian drug company recently subpoenaed by the Securities and Exchange Commission, have resorted to lawsuits and the media to strike back at short-sellers.
A Novastar spokesman did not return a call seeking comment.
Novastar shares closed at $31.50 last week, up about 12 percent this year. They are trading in the midrange of their 52-week spread - a high of $42.55 and a low of $24.08.”
Yes, Roddy, NFI, which has doubled their earnings since the stock traded in the $70 range, is now trading at less than half that, two years after the frivolous class action suit was launched and the media feeding frenzy of negativity was put into high gear. It has the highest short interest today than almost at any other point in its history. It has provably been brutalized by illegal naked short selling for years (the recent FOIA data proves that conclusively), and currently trades at a 100% discount to peer yields – despite having the best performance in the sector. Favorite of Cramer and Herb NLY, also a mortgage REIT, has slashed its dividend by about 90% over the last year or so (even as they were touting it), and yet trades at a 4% yield (carrying a premium over a risk-free CD) while NFI trades at a 17+% yield, having grown its business phenomenally, and carried forward $209 million it must pay out by Fall, 2006 – around $6.50 per share just this year, for an effective yield of 24% or so on the total payout of around $7.50-$8 for 2006.
So again, the company that has been provably the best in breed, NFI, is throwing an effective 24% forward yield, while NLY, arguably one of the worst in the breed, is paying 4% yield.
And the shorts are still advancing the same hackneyed and long debunked arguments they used 4 years ago – just this weekend in Businessweek NFI is described as “risky due to default risk” – again, predictably ignoring that it has the second lowest default rate in the industry, and that those predicting these defaults had predicted we would have more than seen it hit by now after rates climbed for well over a year. It is nothing more than a reprint of negative propaganda that history has proved 100% wrong – and yet we keep on seeing it. You read that, and you think, “wow, there is a lot of risk at NFI of defaults” – and the true story, that this lie has been advanced since July of 2002, is ignored. Because that isn’t the agenda, now is it?
So what can we take away from this? If you do nothing about illegal stock manipulation and libel, and outperform everyone in the industry, your stock will trade for less than half of what it did before you doubled earnings.
If you sue the miscreants, and expose their larceny, your stock will trade for less than half of what it did before they went to work on you.
Seems pretty simple. Illegal stock manipulation can depress the value of a company by more than half, and it doesn’t matter whether it has stellar performance, or no earnings to speak of. Same end result.
Which is why it is illegal.
Did I miss anything?
Roddy’s entire article can be read here:
http://www.nypost.com/business/64526.htm