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The Short Case On Unisys: What Goldman Knew

Thank you for your compliment.

You are absolutely correct in stating that this is not our usual format. At the time of publishing we could not confirm the Goldman position in UIS. Here is what is behind the scenes. GS can not issue a sell rating and continue to hold or accumulate shares – unless they’re looking for a big fat class action law suit.

As of 9/30/06, Goldman Sachs Asset Management held 7.7M shares or 2.3% of the float. In order to reduce their position substantially they had to first downgrade from hold to sell. Once issued, they are committed to selling a substantial part of their holdings within a reasonable amount of time. Normally this is no big deal. The way to go about it is to sell off 400K to 600K a day, taking a breather every 3rd day or so in order to sell off into strength. The problem that we noticed was the massive sell volume on Wednesday (6M) which meant that Goldman wasn’t alone. This also explains why we missed the boat on Wednesday as we waited to see ‘who’ and ‘how’ was selling.

Tudor Investment Corp. has been selling as well and the latest info we have is they hold approximately 4.9% of the float. When you put the two together, even if BlackRock and MMI pick up the slack, they will do so only on a 10+% pullback in order to average down their cost. As you can see, even if ‘the market’ (see last paragraph) wants this stock to go up, when two major shareholders start pulling out, you inevitably get a price correction. Tudor has not stated its intentions.

To put it another way, we usually do not get excited over a downgrade. It all depends who is downgrading, what their position is and note if it is a ‘hold’ or ‘sell’. We normally don’t bother to look into the ‘holds’. A ‘sell’ rating has to be carefully scrutinized. For instance, if UBS issued a sell, it wouldn’t mean much simply because they don’t own a significant amount of shares. Now if Brandes started unloading, that would be very noticeable as they hold nearly 15% of the float.

As per usual, the reason stated for the downgrade is just the salad dressing. Hardware sales are not the main part of UIS's business. The real reason is that the turnaround is not happening. In addition to reducing R&D by 30M, UIS also sold off Unisys Media for about 50M in Q4. In other words, UIS is selling off piecemeal in order to post a profit whereas the core business is still losing money. This wasn’t broken down in the last filing, but we do track UIS so we are familiar with the inner transactions throughout the quarter. There is more.

Even with all of the above and ten times the bad news, we would never short a stock that is so heavily held by major institutions. We are not suicidal. However when the institutions start pulling out – it’s time to get out or short.

The institutional holders are ‘the market’ for UIS, and as you correctly stated – “the market determines the price of a stock, the numbers do not”. The numbers apparently determine for ‘the market’ whether to accumulate, hold or sell.

Saul Sterman
CrossProfit