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Short-selling has gotten a lot of attention lately. Internet retailer Overstock.com (OSTK
) and pharmaceutical company Biovail (BVF
) recently blamed their stock slides on smear campaigns engineered by hedge funds and stock analysts. The accusations got a favorable hearing on 60 Minutes and prompted the Securities & Exchange Commission to look into the matter.
Hurling allegations isn't the only way to fight short-sellers, however. Consider the tale of upstart beverage maker Hansen Natural Corp. (HANS
), whose Monster energy drink has come out of nowhere to steal market share from category leader Red Bull. Short-sellers, who control nearly one-third of Hansen's publicly available shares, are convinced that Monster is a fad. Even if it isn't, they say, Coca-Cola Co. (KO
) and PepsiCo (PEP
) have the marketing and distribution clout to crush Hansen if their own energy drinks finally catch on. "Consumers will eventually wake up and realize all this stuff is just the same sugar water," says a short.
It hasn't happened yet. Instead, Hansen's shares have surged from $2 to $130 since 2003, and earnings have increased from 28 cents a share to an expected $3.92 this year. Hansen's market value sits at a lofty $2.9 billion. The company reaches its core demographic, males aged 18 to 30, by flooding retailers with giant cans of its energy concoctions -- the supersize answer to the dainty Red Bull.
That the shorts have fared so poorly is notable in itself. Factor in Hansen's limited coverage on Wall Street and management's refusal to play the investor relations game to woo shareholders, and the extent of the "smart money" stumble is striking. Hansen, in Corona, Calif., is beating the pros by doing what it does best: selling drinks.
Shorting a stock involves borrowing shares and selling them in the hope that their price falls later. If it does, the short-seller can buy back the shares at the lower price, return them, and pocket the difference. But if the price goes up, shorts can cover their position only at a loss. The faster the price rises, the faster they try to cover, a situation known as a short squeeze. It's akin to panic buying.
As Hansen's stock keeps climbing, the shorts are scrambling to buy shares. At the same time, they become more convinced the stock will fall, and they short all over again -- a frustrating pattern.
"Those shorting Hansen don't know its story that well," says Alton Stump of Cleveland independent research shop Longbow, one of only three analysts who cover the company. "It's this perpetual cycle: You come in, learn your lesson, get out, and then others short until they learn theirs."
Shareholders, naturally, are overjoyed with the stock's rise. Jason D. Schrotberger, a portfolio manager with Turner Investment Partners in Berwyn, Pa., which owns about 4% of Hansen's outstanding shares, says that in the past two years, Hansen has graduated from Turner's micro-cap portfolio to its small-cap roster, with its midcap universe just ahead. He says the shorts are chronically wrong on Hansen because they simply can't comprehend a hypergrowth company in a sector of slow-moving mammoths.
The shorts have pointed to Hansen's apparent lack of sophistication in its dealings with Wall Street as a reason to sell. "They're definitely not investor-savvy," acknowledges Stump. Hansen refuses to offer earnings forecasts and doesn't even have an investor relations department. Chief Executive Rodney C. Sacks is unapologetic. "The stockholders are not our target," he says. "I'm not trying to persuade a 60-year-old fund manager [to buy shares]." Instead, says Citigroup (C
) analyst Gregory Badishkanian, "they really just focus on operations."
Management has no shortage of incentive to keep doing that. Fourteen years after taking control of Hansen, Sacks and Chief Operating Officer Hilton H. Schlosberg still own 25% of the company, a stake worth more than half a billion dollars. "They have skin in the game," says Stump. "You would think that would be a deterrent to shorts."
Sacks sees no need to sweet-talk analysts and investors in a public-relations campaign. He says Hansen's Yahoo! stock (YHOO
) message board offers "the best research that can be done," including analyses by users who visit stores to check on Monster's shelf presence. "PR," says Sacks, "is not what we're doing. I bank sales from cans." By Roben Farzad