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Dr. Kellegro Initiates Short Sale of DBRN

|Includes: Ascena Retail Group Inc (ASNA)

 Dr. Kellegro initiates opinion of DBRN and has commenced short sale activities in the common stock of the company.

The common theme of Dr. Kellegro’s investment philosophy is based on cyclicality within various sectors. The issue of cyclicality is more prevalent in some sectors as opposed to others. One such sector where cyclicality exerts the most dominance, with few exceptions, is speciality retail.

As such, the speciality retail space is rife with opportunities for astute short sellers to capitalize on the propensity towards reversion to the mean type moves within specific equity issues.

Management within companies are not immune to being influenced from the bullish behavior in their stock prices and become extremely susceptible to making significant mistakes as their comfort zone increases due to faith in the price momentum of their stocks.

Management will typically take the position of accelerating the opening of new stores; becoming distracted with new ideas that end up being detrimental to both the top and bottom line; making unnecessary additions to staff and management; and increasing inventory due to unrealistic expectations or understanding of the cyclical nature of the specialty retail industry.

This leads to a slow accumulation of “poison darts” that puncture the skin of the company and slowly plant the seeds of its cyclical downturn as it marches ever higher.

DBRN is now in the mature stages of its cyclical upturn, appreciating near 500% from its low in 2008 to its most recent high in 2010. The cycle has lasted nearly two full years, which falls in line with the average length of such a cyclical move with small to mid cap stocks within the specialty retail space. The risk/reward equation from both a price and time perspective favors short sellers from this date forward.

Both insider’s and substantial shareholders in the stock are realizing that the risk/reward equation has shifted as the CEO recently made one of his largest sales in recent memory with a $4 million sale in common stock. This was followed by sales from the likes of Bob Olstein, a long-time value manager and George Soros who completely disposed of his position in the stock.

Short interest in the stock has been declining steadily, as illustrated in the chart below:

A substantial short squeeze has taken place, which aided the equity price in its near parabolic move since its lows in late 2008. This has taken a substantial number of short sellers out of the marketplace and they are only now beginning to reemerge. The annihilation of short sellers is an essential component to an upward cycle reaching its maturity phase, as the markets rarely give away free lunches without inflicting the maximum amount of pain unto the group of investors who are the most susceptible…in the most recent case, short sellers. The burden of pain will now shift to long side investors.

The fascination with various measures of valution is an effort in futility with respect to cyclicality, as valuation has little influence within the overall cycle. The cycle is purely driven by psychology, which influences the stock price in various stages. Therefore, no valuation measures or fundamental data pertaining to business performance will be mentioned here, as it is irrelevant.

Dr. Kellegro has initiated a short position in DBRN and will be eager to add to this position should the stock move higher in the coming months.

Disclosure: short dbrn