Novatel, Sierra Wireless: A Seasonal Squeeze?

Two of the most manipulated stocks in America -- right up there with Overstock.com (OSTK) -- are Novatel Wireless (NVTL) and Sierra Wireless (SWIR). These "twin" stocks track each other's price movement hour by hour, day in and day out.

Not that they move as a perfect match. Some days the black box traders maintain a neat $1 gap between the two, selling just enough of one and buying just enough of the other. Occasionally their prices are allowed to drift together, like oppositely charged magnets. When they meet, however, their polarities reverse and the repulsion is often violent. Many days, their cumulative volumes stay within a couple of percent.

There is a reason for their unity. They are direct competitors, both in the business of making wireless modems for mobile computing. Their share counts are a few percent apart so their market caps are nearly identical.

Each stock trades as though only one thing matters--specifically, what the other is doing. The fundamentals are ignored. Each firm reported earnings of around 25 cents per share in the recent quarter, compared to losses in the quarter 12 months earlier.

That kind of growth -- paired with annualized earnings of a buck a share -- ought to yield a price better than the mid-teens, where both have been lately. The math is simple. A suitable growth P/E ratio of, say, 40 would produce a share price around $40. At 50, it would be $50.

The ball and chain has been the substantial short ratio. SWIR's is in the 20 percent range and NVTL's is around 30 percent. Needless to say, the potential for a squeeze is substantial. That's what happened in the 18-month period beginning in October 2002, when SWIR moved up 1,800 percent, from $2.50 to $45 per share. NVTL made a similar move, though its rise began a bit later, right after New Years 2003.

A very bad time to be short, then and perhaps now.

Disclosure: none

Comments

[Brandon Barker:]

As you all likely know, SWIR is on the prowl for acquisition opportunities. They currently have $184.5 million in cash of which only $60-70 million is needed to run the business. Therefore, we can potentially see $124 million being used for acquisition purposes. We can see even more if they decide to issue stock in conjunction with the cash offering as we saw with the Airlink deal. So what can we expect?

In Dave McLennan's (CFO) presentation at the Lehman conference on Dec. 4th, he mentioned that they are looking at the M2M sector for acquisitions. He said that they have several targets in the pipeline; however, for competitive purposes he was very general in his discussion. He did, however, mention that the acquisition could be game-changing or it could be something on the level of the Airlink acquisition which only cost about $31 million.

CIBC in a Q3 report discussed the possibility of an acquisition of a company such as Wavecom, a heavy player in the M2M business. This I would categorize as the game-changing type. They also briefly discussed a potential SWIR/Option merger. This on the basis that SWIR has a huge North American presence, while Option has a huge European presence. This too would be a game changer. Whether we give these possibilities credence or not, let's remember that CIBC did purchase 1,900,000 shares of SWIR at $22.40/shr. They did not do so blindingly. I imagine that they have more insight than I do, and I hope they're right. Also SWIR's management seems to have their act together when it comes to making acquisitions. Airlink only cost $31 million; however, it currently produces over $20 million in gross profit. One hell of an acquisition if you ask me.

I have no idea what their M&A plans are, but I think that we will go up tremendously based upon the existing business. If we add an accretive acquisiton such as discussed, we will all quickly forget about these dire days. Again, I'm not sure why anyone would risk shorting this powder keg, but their short squeeze will make me much more financially stable. I guess we shall soon see who's right!!!

Take care,

Brandon

2008 Jan 02 02:10 PM