Not many companies, let alone Nasdaq-listed companies, are able to octuple in price in under 2 months so it’s only natural to want to short Superconductor Technologies Inc. (SCON), a maker of a high-temperature superconducting filter (which reduces interference in wireless networks that leads to dropped and blocked calls), here at $11.70. As cynical a short seller as I’ve become and as much as I love shorting into fundamentally lacking companies, I think this one has further to go.
Ah yes, for I am also a battle-tested short seller and I’ve seen many a stock continue to rise contrary to reason and give into hype. Let’s look at SCON’s numbers: a $146mm market cap, for the six-month period ending June 30, 2007, total net revenues were $8.9 million (and losses of $4.9 million), compared to $9.9 million (and losses of $6 million (excluding some one-time charges)) for the first half of 2006, $6.5 million in working capital ($2.9 million in cash)–basically the numbers say this company is going nowhere.
So why all the fanfare lately?
The runup started on August 22nd with this PR announcing they received a $15 million investment from Hunchun BaoLi Communication Co. Ltd. at $1.63/share. SCON ran to the $3 range, a nice double.
Then, on August 27th, this PR about a potential joint venture with that same hard-to spell and I-don’t-even-want-to-try-to-pronounce Chinese company (which manufactures push-to-talk handsets) pushed SCON up to $8–short sellers like me were drooling! Sure, the joint venture could be big time, but in my experience, most of these deals fail for one reason or another.
No matter, since then, SCON has just kept rising and there are nearly 2 million shares short (1/6th of the float, but that was as of September 25 so the number is liekly higher now) who wish this stock would just crater.
My advice: sit on the sidelines and let the hype play out. China and wireless are not two trends you want to go short on when there’s seemingly unlimited potential…for now. There’s been plenty of chances for profit taking and yet even with several dips, SCON has continued making new highs. That’s a good sign hype is in charge…for now. Of course, I wouldn’t buy the stock either as this really could collapse within a day or two if there’s any hint that this joint venture isn’t all it’s cracked up to be. If I’m right and SCON keeps heading higher, these kinds of plays like to go out with a bang, we’re not talking $13 or $15, but $20 or even $25–yup, it can get crazy. If that kind of price action occurs, then I might buy in for a few quick hits, just because I know the shorts will be crying out in unison as they get squeezed higher.
Remember either way, this is risk, risky, risky and I love it! The key is to play this conservatively and rationally.
Disclosure: Timothy Sykes has no position
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