Wednesday, July 19, 2006

Turning Stupidity into Cash - Round 2

This DISCLAIMER applies.

$25 January '07 PUT
BID: 4.60
ASK: 4.80

We were led to Overstock long ago by the antics of her loopy CEO. Now that we've confined ourselves to the world of stocks with listed options, it is unlikely that we will find many other companies with CEOs that behave like pink sheet/penny stock operators.

Just because we might not find another "Dr." Byrne in our quest for put candidates doesn't mean that we won't find groups of loopy shareholders convinced that "naked short sellers" are harming their investments and that the way to "fight back" is to loyally hold their shares, come what may, as the company spirals into the ground.

Netflix provides such an opportunity. The first warning sign that Netflix would be a good put candidate was the widely disseminated story within "Get Shorty" circles that David Patch had latched onto Netflix. As anyone who follows the "naked short seller" scam is well aware, David Patch is the kiss of Death for any company that attracts his attention.

There is a lot of stupid money following the "naked short seller" movement and some of that stupid money has found its way into Netflix shares. Our selection of Netflix as a put candidate is in no way an indication that we feel Netflix management is either incompetent or criminal. However, they operate in a business environment that has become extremely cut-throat. And while the use of the postal service may have been a great way to cut out overhead from the "physical retail floor" model of video rental, both models will eventually succumb to digital forms of delivery in the very near future.

PRO: Absurd valuation, slowing growth, and stiff competition in a media delivery format that is technologically obsolete.
CON: Company actually has earnings. And while the valuation is silly, the company is in not in imminent danger of financial insolvency.