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The key sign that could've saved the TSTY shorts

|Includes: Flowers Foods, Inc. (FLO)

Tasty Baking successfully found a buyer after all in Flowers Foods. My analysis was correct on a fundamental level, but there was more to it than that. Little did I know, Grupo Bimbo and Flowers are in heavy competition had a lot to do with the buyout. The Philadelphia area is like a chess piece for them: Grupo blocks and Flowers expands. Through Tasty's products and established selling spots, Flowers is now able to expand through the tri-state area.

The key paragraph which tells volumes of what the company is up to is in their NT 10-K here. Look at the second paragraph of Narative III :

The management of Tasty Baking Company (the “Company”) has determined that the Company is unable to file within the prescribed time period, without unreasonable effort and expense, its Annual Report on Form 10-K for the period ended December 25, 2010 because management needs additional time to finalize its financial statements and related disclosures while it simultaneously pursues various strategic and financial options to address the liquidity issues facing the Company, as summarized below.

This paragraph tries to hide it, but it speaks volumes. What it says, is while the company's management is going through all the paperwork for a buyout, it doesn't have time to file on the due date.

What I did is underestimate management. Sure, they really screwed up with managing the company, but they're not the 3 Stooges. They obviously had to accomplish a lot to get the positions they had at a company that has gross revenues of $280 million a year. For them to not come up with some kind of deal after putting out an NT 10-K would look really bad. The management already has a bunch of people mad at them and calling them failures, like the city of Pennsylvania, its creditors, and its investors. Like everyone, the TSTY management cares about their reputation and they don't want to look like failures. They would look either incompetent or lazy if they aren't able to put together their 10-K on time and then not see any results anyways.

That paragraph may not guarantee that a buyer is in the works, but one could assume that at least something was cooking. Maybe a PIK loan or some kind of reprieve. Either way, it would've been construed as good news and the stock would go up regardless of what it was. Because of that, a short covering and maybe a buying opportunity arose.

The thing with the NT 10-K that scared all the investors and made it go from $2.20 to $1.50 in a couple days, was the last sentence in Narative III:

"The Company anticipates that the Company’s Form 10-K for fiscal year ended December 25, 2010 will include an explanatory paragraph from the Company’s independent registered public accounting firm expressing substantial doubt about the Company’s ability to continue as a going concern."

The words
"expressing substantial doubt about the Company’s ability to continue as a going concern" from an independent accountant sends chills down the spine of investors. They're buzz words for impending doom.

Then the stock managed to pop back up to $2.00 in the next day or two. I wonder if investment managers read into that second paragraph and took advantage? Possibly.

As for me, I was looking through rose colored glasses and although I made other mistakes too, that was a big one. I had so many facts and heard so many people dog TSTY, that I was overly sure they were going bankrupt.  It's a learning experience and I will also try to keep an objective view on my stocks from now on so I don't miss important signs like the second paragraph again.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.