Heelys Tanks On Dilution Concerns

I made a last minute buy of Heelys (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 (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.

Comments

[Ron Himelfarb:]

Jim, I think the secondary is only part of the reason the stock will fall today. I happened to be listening to the cc after the earnings release, and the stock was falling well before they announced the secondary (midway through the cc).
Important to note that the evidence that the fad is fading is in the release....lower gross margins, as well as guidance which indicates that the third quarter of this year will be flat or lower than the third quarter of last year.. If you look at their sales these last three quarters, they have been in the 65-70M range, which seems to indicate that they have lost sales momentum.

The secondary happens to coincide with the end of the six month lockup following the IPO. Clearly, the insiders recognize it is overvalued ....and want out.

2007 May 08 07:44 AM

[brombonz:]

"Mega-DILUTION?" (Emphasis mine.)

If these shares are as described, they are SECONDARY shares, already outstanding. There will simply be a transfer of ownership. An indication of weakness based on insider selling? Very likely, allthough I've seen this apparent signal err: prime example -- one of the three founding Marciano brothers of Guess?, Inc., filed a shelf offering to sell ALL of his shares when the stock price was about $2 (adjusted for a 2:1 split). The stock never looked back and so far has topped out over $43 . One difference, GES was coming off long-term poor performance that turned out to be a bottom.

My idea of "Seeking Alpha" contributors is that they are at least a little more sophisticated than this.

2007 May 08 08:47 AM

[jbs:]

It's not "dilution" but I'll give the author the benefit of the doubt.

2007 May 08 10:14 AM