Focus Media: Short Squeeze Developing?

As of the latest short selling report, the number of Focus Media (FMCN) shares sold short stands at over 21M or more than 16% of the company's total outstanding shares. 

Short sellers have capitalized beautifully on what has amounted to a perfect storm for the company’s share price.  The first tempest came in the form of a massive sell off in shares of China based companies that began late last year and continues to this day.  The second came in Q1 as a result of the company being forced to discontinue their mobile advertising business after it was determined to be sending what amounted to spam SMS messages to millions of Chinese citizens.  Then there was the Tibet uprising, the earthquake, rising food and gasoline prices, and finally the recent sharp sell off in US markets. 

All of which has resulted in company’s share price falling over 55% from a year to date high of $59.37 reached on January 3^rd to a low of $26.50 reached on Friday June 20th. The shares now trade at levels not seen since the 4^th quarter of 2006.

Although the sell off accelerated over the past week, it’s beginning to appear that all the fun and excitement may be coming to an abrupt end for the exuberant short sellers of Focus Media shares.  Like thousands of people attempting to exit a sold out stadium after a game or concert, you can’t get out as quickly and easily as you got in.  A similar situation can develop when short selling stocks when too many investors get on the wrong side of a trade. 

Short sellers by nature are a nervous and trigger happy bunch.  When a shorted stock reverses course and starts to move abruptly north, they act quickly to cover their positions to mitigate potential losses. 

With over 21M shares currently sold short, it will take nearly 7 days of normal trading for short sellers of to cover their positions.  This creates an appetizing situation for an opportunistic hedge fund, large investor or even the company itself via a stock buyback announcement to send the company’s shares barreling northward and send short sellers frantically running for the exits. 

Even without the above “squeeze” scenario playing out, and barring any new bombshells from the company or a major negative macro economic development, the company’s shares are likely to begin a climb back into the low to mid $30’s prior to the Q2 earnings announcement expected in early September. 

At current prices, the shares trade at just over 47 times trailing annual earnings, which includes the one time charge related to the discontinuation of their mobile advertising business.  This P/E multiple may seem high under current market conditions, but consider the company grew revenues by 214.7% in Q108 (excluding revenues from the discontinued mobile advertising business).  Based on this, the shares currently trade at a significant discount to the company’s trailing and projected revenue growth rate.  This has caught the attention of numerous Wall Street analysts, many of whom have buy recommendations and lofty price targets for the shares. 

While I do not share the same exuberance of some analysts who cover the stock, I am bullish on the company shares over the next 18 months.

The company has an analyst day scheduled for Monday June 30^th, which could create a market moving event either positive or negative.  Shareholders will want to stay tuned for any possible developments. 

Finally, as with all China based companies, investing in individual companies is risky business and not recommended for amateurs. 

Disclosure: The author currently maintains an actively traded long position in shares of FMCN..

Comments

[bnymon]

good call! I stared to build a position at ~$27 and change...time to rock!

[buyforeclosures]

Great company LONG term. Chinese stocks have to be held for years to have peace of mind. Trading them can drive you crazy

[punter888]

It is fascinating that the short interest is so big. The analysts have been bullish all the way down from the peak. This is a huge short interest, and somebody clearly thinks they know something that the street doesn't know. If there is a time bomb ticking here, it is the Dec 2007 under the radar screen announcement that China would require licenses to operate these outdoor media networks. At the same time, nobody knows how to apply for these licenses. I am not aware, though honestly I havent checked, whether Focus has the onshore/offshore holding structure that can at least accomdodate issuance of a license to a PRC entity.

I would guess that well informed parties lie behind such a huge short interest, because the street clearly isn't looking at the headline numbers on this stock. Somebody is clearly betting big that this time bomb is indeed going to explode.

[buyforeclosures]

Yeah nice squeeze... Not! Hopefully Goldmans reiteration to $58 will help

[glassbox]

Yes, it would be even more interesting if we knew who the shorters of these stocks were. Just like we know who are long. There should be disclosure standards on the stocks - just like there are disclosure standards required for those who are major shareholders or sitting in managmenet. The whole system for stock lending and shorting is completely flawed in disclosure and this has resulted in a asymmetric information gap - which is obviously just by itself presents a good opportunity to make some money, under cover.

Punter, you are right in asking who these 'well informed' parties could be - I think anyone who is trading this stock should have a right to have access to that information.

FSA recently required disclosure of those holding short positions with the view to find out who had deliberately depressed stock prices in the event of a rights issues. I think to be fair to every one out there - this inbalance must be corrected.



On Jul 02 11:38 AM Punter wrote:

> It is fascinating that the short interest is so big. The analysts
> have been bullish all the way down from the peak. This is a huge
> short interest, and somebody clearly thinks they know something that
> the street doesn't know. If there is a time bomb ticking here, it
> is the Dec 2007 under the radar screen announcement that China would
> require licenses to operate these outdoor media networks. At the
> same time, nobody knows how to apply for these licenses. I am not
> aware, though honestly I havent checked, whether Focus has the onshore/offshore
> holding structure that can at least accomdodate issuance of a license
> to a PRC entity.
>
> I would guess that well informed parties lie behind such a huge short
> interest, because the street clearly isn't looking at the headline
> numbers on this stock. Somebody is clearly betting big that this
> time bomb is indeed going to explode.