Seeking Alpha
Long/short equity, special situations, event-driven, contrarian
Profile| Send Message|
( followers)  

Copperfield Research -CR- has done a quite a job putting a cloud on magicJack (NASDAQ:CALL) by posting here on SA and on different blogs such as short-centric theStreetSweeper.org on different companies. Before we get into the questions we have with the research, we must tell an anecdotal piece of research we conducted this past weekend on CALL. We called our local Radio Shack (NYSE:RSH) which is known seller of CALL's products. The first one we called was out of stock for magicJack Plus. The manager said she would call around to the other stores to see if she could find one and took my number. She hasn't called us back yet. I then asked her if it was selling well and she said absolutely. It sells right out. Then, later that day, we were passing by a strip mall in Pawling, NY and my little boy yelled, "There's a Radio Shack here dad!" We stopped and went in. They had one left. I asked the manager if they were selling well. His answer, which I can't believe I heard was, "It's getting to the point where I am selling more of these magicJacks than cell phones here." We set magicJack Plus up in five minutes. It works fine. More on our user experience later.

Now back to the CR report which is partly available here on SA. The first thing that hits you when reading it is :"Fair Value: $4.95 - $7.15 per share"

It's highly unusual for a research report that recommends a short position of this type to state any fair value at all, period. Most, if not all, true short sellers proclaim, "That stock is a zero!" Why CR doesn't say it is a zero given all the bad accusations in the report is amazing to us. The rest of the report goes on to blast inadequate risk disclosures, mismatching cash generation between earnings release and SEC filing, general dislike and mistrust of the former CEO and his former company. The bottom line is that if all the things they report were true, they would have to say the company is a zero, but they didn't. Could that be because they know the product sells? Or could it be that the product works? We think the answer to that is a simple "yes". If we could describe the former CEO in one word, it would be "shark". It's just like playing cards with a "card shark" where you are bound to lose. We wrote an Instablog here on SA called "Welcome To Short Sellers Anonymous" about a basic rule a wise short seller once said to us, "Never short a shark!". While the former CEO is now out of the picture, he certainly created a product that works well. Therefore, we would not short CALL for the following reasons:

1.CALL has approximately $50 million in cash and no debt. There is no imminent bankruptcy risk and therefore not a zero.

2.The product works and seems to be selling well. It's a cheap alternative to local phone service and saves cash strapped consumers money.

3.The shorts have depleted the supply of borrow-able shares and the current negative rebate (cost to borrow in order to sell short) ranges from 57.5% to 75%, but it's a meaningless rate because there is no availability.

4. It seems the shorts are exacerbated with the recent rally in the market and with several recent short-squeezes currently in the spotlight and most notably Tesla Motors (NASDAQ:TSLA). We urge you to watch analyst and journalist Herb Greenberg on this clip from CNBC yesterday. Herb is viewed as a spokesperson for short sellers by many observers. He makes great points. However, on this clip, Herb seems to be at a loss for words on what's happening to those who are short.

CALL is a public company created by a reverse merger. reverse mergers almost always come under attack from short sellers for one reason or another. We urge anyone considering a position in CALL to read the CR report. We have, and we have tried the product. It works well but is very promotional at the same time. When you are registering the product on the Internet, CALL tries to up-sell you to other products such as vanity phone numbers. That's smart business and all retailers try to do it in different ways. The user interface for the magicJack Plus has the company's stock symbol CALL on the screen. Hey, if you like the product, buy the stock. Whether you buy the stock or not, that's your decision. But one thing is for sure, don't short CALL in this short squeeze happy environment even if you can find some shares to borrow.

We also think that the board of directors at CALL can do many things to clear up the confusion that the CR report asserts. It certainly would help the stock in the longer term and their shares as well.

Source: MagicJack, Never Short A Shark