The Long and Short Of Tech Stocks

MARKET SHARE Bob Starzynski

The Long and Short Of Tech Stocks

Just because someone bets against you, it doesn't mean you are bound to lose.

But when a lot of people are betting against you, there is obviously some doubt about your chances. After all, when was the last time a horse won the Kentucky Derby while posting 90-to-1 odds? (Answer: I haven't the foggiest idea.)

Such is life in the short-selling business. Not surprisingly, three of the top five short interest stocks on the New York Stock Exchange are tech companies. Nine of the top 10 shorts on the technology-rich Nasdaq National Market are tech companies. The only non-tech company in Nasdaq's top 10 is Boston Chicken. WorldCom, Dell Computer, Tele-Communications, Intel, Nextel, Microsoft, Sun Microsystems, Cisco Systems and Tel-Save Holdings make up the rest.

Let's digress for a crash course in short selling. When you buy a stock and then sell it, you have sold that stock long. Your intention is to sell the stock for a higher price than you paid in order to make a profit on your investment.

Short selling is sort of an opposite approach. You borrow shares from a brokerage and sell them, hoping to buy them back later and return them at a lower price. For instance, you want to short sell XYZ Corp., which is trading at $50 a share. Your broker lends you 100 shares to sell. When you sell them, you have $5,000. Over the next six months, XYZ's stock price drops to $30 a share. You buy the 100 shares back for $3,000 and return them to your broker. Subtract your buy price from your sell price, and you made $2,000 on XYZ's misfortunes.

A broker will typically charge you interest for borrowing shares, so the longer you hold your short interest, the more you owe in charges.For the purpose of simplicity, just remember that short sellers are betting a stock will fall.

Now back to the tech companies. Because they bank more on future prospects than on tradition, their stocks are the first to rise in good times and the first to fall in bad.

Times are good now on Wall Street, and tech stocks, for the most part, have performed well. America Online has nearly quadrupled its stock price in the past year to as high as $92 a share. Dell has almost quintupled, hitting $98 earlier this month, compared to $22 a year ago. There are many more.

Wall Street ought to be saying, "Holy cow. This has been an amazing ride. But it can't last forever." Instead, you hear, "Yeah, fine. Keep it coming. I'm getting stinking rich and there is no end in sight." But there is another voice: "This overvalued market house of cards is about to get caught in a brisk wind," says the short seller.

"A number of the Internet stocks are really crazily priced right now, including Yahoo, Infoseek and America Online," said William Lyons, who publishes Short on Value, a financial newsletter on overpriced stocks and short selling. "Expectations are so high on those guys right now."

As of April 15 - the latest figures available through Dow Jones - Dell had 30 million of its shares in short interest, awaiting a fall. Granted, that is under 5 percent of Dell's total shares. But it is still almost $3 billion bet against the company. America Online, at the same time, had 19 million shares shorted; close to 10 percent of its total shares outstanding. That number of shares almost doubled in one month's time, putting America Online near the top of the New York Stock Exchange's short interest list.

Other technology companies high on the Big Board's short list include: Compaq Computer with 75 million shares shorted; Micron Technology with 39 million shares shorted; AT&T with 36 million shares shorted; SBC Communications with 22 million shares shorted; and Iomega with 20 million shares shorted.

On Nasdaq, the only company to have a short position comparable to Compaq is WorldCom, also with 75 million shares shorted - roughly 7 percent of the company's shares outstanding.

For questions, comments and suggestions, contact Bob Starzynski via e-mail at bobs@pnbi.com.


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