Short Squeeze Possible Following Sherborne's Large Nautilus Investment

Sherborne Investors LP announced that they have recently acquired 23.5% of Nautilus Inc. (NLS) and that they plan to seek change by giving the Board of directors an ultimatum that four of the seven members resign (including one recently appointed) or face a shareholder meeting to seek their removal. What is even more interesting is that they went out of their way to announce most of the shares are not held in the "street name" and thus they may be setting up for a potential short squeeze considering that short interest of Nautilus is 9.4M shares out of 31.7M issued and stands at 30%. Sun Capital Partners also this summer announced a stake in NLS of 9.9% and if they were to go the same route of taking shares out of float and "street name" it would effectively boost short interest to around 50% of the remaining shares.

It is one thing to short a stock burning cash and with no underlying assets, but NLS is neither of these. In fact they have a predictable pattern of revenue and significant tangible assets. If one looks to Sherborne's history of performance, particularly with the battle they waged with UK based Spirent Communications you'll see a clear pattern of unlocking value and creating returns. According to Sherborne's own web site:

We develop a turnaround thesis, acquire a significant equity position, and then obtain a shareholder mandate to effect a change in board composition. Sherborne does not agitate for others to make changes; rather, we assume responsibility for directing or managing a turnaround for the benefit of all shareholders.

Some famous short squeezes of the past were Rambus (RMBS) in 2000, which went from $20 to $117 in a month and Travelzoo (TZOO) in 2004 and also again in April 2006. It's not out of the question to think that the same could be set up for NLS with no fundamental change in the business, however throw in Sherborne's plan to unlock value for the shareholders and you have a select event-driven value investment poised for a substantial short squeeze.

Disclosure: Author has a long position in NLS

Comments

[Phil Obal]

You were wrong on the short-squeeze on NLS that it would go up... It went down down down.... Under $6.00 right now!