Heelys Tanks On Dilution Concerns

May. 8.07 | About: Heelys, Inc. (HLYS)

I made a last minute buy of Heelys (NASDAQ:HLYS) May puts ahead of the close Monday. I should have been slaughtered because the company posted EPS that beat the street by a whopping 10-cents a share. HLYS is the company that makes those sneakers with the wheels in them that are all the rage among the kids these days.

My reasoning for going long puts was the stock was sagging going into the close and that with overwhelming demand for calls, the crowd was going to be wrong in turning this into another Crocs (NASDAQ:CROX) phenomenon even as put volume had moved up in the final half hour. With blowout results and upped guidance, the stock should have soared from its 4 p.m. close at $36.34.

Instead, the stock finished the evening at 31.63 and could break its all time low at just above $27. The unpardonable sin for this one? An SEC filing announcing shareholders are going to unload 8 million shares, or about a third of common shares held by stockholders. Holy Cow, can you say mega dilution? HLYS went public less than 6 months ago.

So I got it completely wrong in terms of what would tank the stock, but it still looks like fat city today. A third of the shares are going from insiders' hands, including Heelys largest shareholder - Capital Southwest Venture Corp? Ouch.