Abraham Gaines

Five Reasons to Buy Raser Technologies

Dear AVCONSULT,
I don't fully understand your question. Typically, in a convert, the convert-buyer owns the bond and shorts the stock so he is effectively "hedged" against any movement in the stock while he collects the coupon from the bond.
Regarding the short interest, since the stock wasn't very easy to borrow and was quite thin heading into the convert, Raser undertook the buyback and also a collar deal with ML. As a result, I don't know how many of the 8million shares which are reported short under Bloomberg are related to the deal and how many were shorted directly to ML, as ML acted as the other side of the trade to enable the convert to happen.
What I will say however, is that the short interest was in the 6 to 7m share amount prior to the convert - so let's just look at that figure for the purpose of this discussion.
What will create a short-squeeze? There are a few things in my opinion - in reality, I don't know if any "one" of these will actually burst the stock...my experience is that short squeezes tend to happen gradually and having been on the "wrong side" of them many times, I can tell you they pick up steam (pardon the pun) as the stock moves higher. A short who doesn't want to cover at $10 or $11, will be more inclined to cover it at $12 or $14. it's counter-intuitive but short-squeezes can be very emotional.
Here are a few things which could contribute to a squeeze based upon reasons I've heard people tell me they're short. Typically, squeezes start when legs get kicked out from the short-stool:
1) Merrill financing closing
2) Thermo getting completed
3) Electricity flowing from Thermo and revenues flowing to RZ
4) A deal with Google as a power purchaser or financier (that would be a mother-load, since Google investors would be introduced to RZ - look at what happened to RZ stock when they announced their deal with UTX last year)
5) large institutional holders recalling their borrow, forcing buy-ins

The bottom-line is this: stocks with short interests that are this large a percentage of the float and which don't have high short interests because of a convert (remember we're apples-to-apples here ignoring the size of the convert because of the funkiness of the ML deal), are considered very "crowded." Anything can set them off and create a stampede. Given how "small the door" is on this one - when people feel the need to run for the exits, they will find themselves very boxed out and the stock will lift without much for sale.
Look at who holds the stock - it's a pretty smart group of buysiders. Successful, smart hedge funds and a few long-only guys. My sense is that they're unlikely to part with big chunks of stock when it begins to lift - which will only create more of a frenzy.
Is it worth it to remain short? Only if you think this is going to zero. Otherwise, you're playing with fire in my opinion.