Short Stories: Bradley slams the shorts

Posted May 29th 2007 4:55PM by Peter Cohan
Filed under: Short Stories

Although short selling -- the practice of selling borrowed shares with the hope of repaying the loan by buying back the shares at a lower price -- goes against the American belief that stocks always go up, I have long been fascinated with it. Short Stories discusses what works, what doesn't, and what some of the leading lights in shorting stocks think about its opportunities and threats. I describe possible short trades and I seek your comments and questions for story ideas. I don't offer any investment advice and I don't trade on any of the posts I write.

On October 8 I wrote about Bradley Pharmaceuticals (NYSE: BDY) arguing that I would stay away from the stock which was vulnerable both to a short squeeze and to weak fundamentals. Well, according to TheStreet.com, the short squeeze argument won out -- after BDY's CEO offered to take the company private at a 17% premium over its last closing price.

If you had found the short squeeze argument compelling, you could have bought the stock at $16.47 back on October 8 and could lock in a 37% profit if you sold today at its current $22.49. I find this interesting since BDY's CEO offered a lower price -- $21.50 a share.

The higher trading price suggests that other bidders for BDY could emerge. Or it could suggest that the 3.3 million shares sold short -- representing 20% of BDY's outstanding shares -- could be trying so hard to cover their position that they are driving the price through the roof in a desperate effort to limit their losses.

This is an excellent example of why it's so dangerous to sell a stock short just because it has weak fundamentals.

Peter Cohan is President of Peter S. Cohan & Associates, a management consulting and venture capital firm. He also teaches management at Babson College and edits The Cohan Letter. He has no financial interest in Bradley.

Tags: BDY, Short Stories, ShortStories