Chad Brand

Analyzing Gradient Analytics (BVF, RACK)

Donn,
Hate to tell you, but I have never recommended investors buy RACK shares, so nobody lost any money on such advice.

Analyzing Gradient Analytics (BVF, RACK)

Donn,

It really is "all about valuation." The business model hasn't changed in the last several months, but the stock price doubled between earnings reports. Why? Because with $6-$7 in net cash and $1 in EPS, a stock price of $18 attracts value buyers. I suspect the same thing will happen again after another 40% haircut.

Chad

Analyzing Gradient Analytics (BVF, RACK)

Donn,

Interestingly, whether RACK met or exceeded estimates, by itself, meant EVERYTHING to the short-term, momentum traders who all bailed last night after the company guided down for Q3. The stock was down 33% within minutes. I doubt the people driving it lower were digging deep into earnings quality that quickly. Estimates were done being revised higher, the chart was broken, and as a result the shares are 40% cheaper 24 hours later.

The market is extremely inefficient in the short-run, due in large part to these types of traders. Was RACK worth 60 times earnings earlier this year? Did last night's earnings report warrant a 40% drop in the stock in a single day? Was the $6/10% drop within minutes an "efficient" response to news of Gradient's red flag of RACK earlier in the year? Indeed, I believe all three instances to be overeactions resulting from severe short-term market inefficiency.

Anyway, thanks for the dialogue and congrats to Gradient customers who were short RACK.

Take care,

Chad

Analyzing Gradient Analytics (BVF, RACK)

Donn,

I merely wrote what was being reported by the financial media at the time and therfore relied on their reporting/research for my comments. If the RACK situation was misconstrued by them, and as a result, by me, I apologize.

That said, RACK has blown out consensus estimates in both quarters since my blog posting. In fact, despite the large sell-off today the company has actually guided 2006 sales and earnings above current estimates. I would argue that the drop in the stock price is due to multiple compression (it was trading at more than 60 times forward earnings when the stock was in the 50's) given that the company's projected financial results are actually higher now than they were several months ago.

Therefore, presuming that your red flag on rising inventories was pointing to weaker financial results in the future, and such results are the reason for the stock's fall, I think is very misguided. Remember, correlation does not always imply causation. Perhaps other issues (including valuation) were also mentioned by Gradient and could be behind the drop, but given I am not a customer of Gradient, I do not know if this was the case.