LINE LNCO BRY
For those who have been following the recent $LNCO $BRY merger saga, it's apparent the drama surrounding the pending deal is not fading any time soon. Just after yesterday's close, Linn Energy management unloaded a press release that has sent the stock into a downward frenzy since the opening this morning, currently sitting at $27.35 (-17.84%) as of this writing. But is it warranted? Let's review the lead up to today's opening…
The volatility of late is largely due to a series of bearish articles on Linn Energy published by Barron's, the latest of which focuses on the author's opinion that Linn's accounting practices are sub-par, particularly referencing questionable derivatives strategies and it's use of Non-GAAP financial measures. Interestingly, the author's opinions seem to mirror that of Connecticut Hedge Firm, Hedgeye Risk Management, LLC, who have been heating up social media outlets on the topic for the past several months, and appear to be the source of the bearish attacks.
Hedgeye has directed a great deal of their social media efforts towards CNBC Mad Money Host, Jim Cramer, who has previously been bullish on Linn Energy stock. Clearly, Hedgeye's motive for singling him out runs much deeper than simply being critical of his stock pick. With Cramer having over 650,000 twitter followers, by "mentioning" @jimcramer on almost all of their tweets, they're essentially piggybacking their message to a much larger base than they could have otherwise. In years past, this strategy would prove laughable, but given the substantial growth of social media as a reliable news source, they appear to have had some success. Every day, the number of people talking about Linn Energy or Berry Petroleum on twitter seems to double, as long term investors come out of their slumbers to investigate the commotion, and short sellers are actively discussing where they can get a borrow.
Barron's and Hedgeye have also caught the attention of notable billionaire investor Leon Cooperman, founder of Omega Advisors, the largest institutional investor of Linn Energy. The respected icon, and long time advocate of the uptick rule recently hit the T.V. networks on June 19th, firing back that he was comfortable with Omega's investment in $LINE, and citing positive conversations he had with $BRY management about their continued commitment to the merger. In regards to the $LINE accounting practices under fire, Cooperman reiterated, "We've done our homework on Linn", insinuating the claims are wrong. Additionally, Omega responded by letter to the Barron's article directly, refuting the claims made by the author, and discussing the theory's various shortfalls. Hedgeye also recently responded to Cooperman's letter to Barron's, which in my humble summation, amounts to a response of "Nuh uhhh, I'm right.".
So where do all these events leave us today? It's apparent that the media bear attack on Linn has been successful. Hedgeye has proved that a good negative social media campaign, coupled with feeding articles or information to respectable news organizations can pay off for short investors wishing to drive down the value of a security, and particularly if that security is largely held by mom and pop retail investors (because they are bullied out of their positions very easily) like Linn. The shear panic right now is immeasurable. At this point, many readers may think, "Wait, but now the SEC is investigating, so Hedgeye and Barron's are right, right?..."
Wrong. One of the main functions of the SEC is to protect investors. As I have outlined, it's no secret that Linn Energy has been the center of a lot of recent controversy. We have had social media wars, T.V. attacks, negative articles, T.V. rebuttals, positive articles, personal accusations, letters from investing icons, rebuttals to letters and on and on and on… How could the SEC possibly allow these accusations to go unchecked? Simply put, they can't. It's their duty to investigate. And in my opinion, the SEC inquiry was the goal of the shorts. Given the volatility of the stock lately, it's obvious that news such as this would incite an immediate sell-off.
In the media, Hedgeye is portraying the merger as kaput, finished, no more. The death of the merger is obviously the story that any short investor would be touting right now, so don't be surprised at the insane rumors you hear over the next few weeks. The shorts just came into a healthy sum of money and there's no panic on their parts to cover. I mean, why wouldn't they be greedy and try to take a few more jabs to keep up the selling pressure and see if they can make even more? But don't buy the story that the merger is over. There may be a lot of downward momentum right now, but I have a pretty good feeling that Hedgeye even knows the SEC will eventually give their blessing on the merger. And it will happen… eventually. Remember, Hedgeye and Barron's are on a very, very short list of people who are negative on the stock. The day the SEC files the Letter of Effectiveness approving the merger will be the day that Hedgeye and other shorts move on to another MLP (likely EVEP). In fact, the SEC's blessing will likely sound the end of shorts in Linn Energy for a very long time, and that's a very good thing.
I'll leave you with a quick visual I'm calling, "Bulls vs. Bears"…
Disclosure: I am long LINE, BRY.
Additional disclosure: I plan to increase my positions over the next 72 hours. I have no business relationship with any company whose stock is mentioned in this article, and the views expressed herein are my own opinions.