VeriSign Still Has Significant Downside Risk

Jul.27.06 | About: VeriSign, Inc. (VRSN)

Well, I always told myself I would never be the guy that said, “I told you so!”, so I won’t start now. I wrote about VeriSign (NASDAQ:VRSN) only a few weeks ago. I felt then, and I still do now, that this company is exposing its investors to a lot of downside risk.

This is the situation with VeriSign in a nutshell:

1. The company is on an acquisition binge. The majority of the time, serial acquirers fail to perform as well as expected.

2. The company’s income statement isn’t accurately reflecting its current financial situation.

3. The company’s Return on Equity – the primary gauge for management effectiveness – is declining.

That’s why the stock is already down over 17% from when I talked about it 3 weeks ago.

The company has some fundamental flaws in its underlying business, so it's acquiring other companies to "make up" for that – never a good strategy.

As Warren Buffett is fond of saying, “When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact.”

Oh, how true that is!

Also, VeriSign is making a concerted effort to package its financial statements in a way that makes its results appear more favorable to investors. That, in and of itself, has me worried about this stock. You just don’t know what to expect.

So even though it’s already down almost 20%, it could still reasonably drop another 20% - something I certainly wouldn't want to be around for.