Naysayers place big bet HHGregg will stumble

December 18, 2010

Analysts from the Wall Street establishment almost gush about HHGregg Inc. these days.

When the retailer posted disappointing results in its latest quarter, Sidoti & Co.’s Anthony Lebiedzinski called it “a mere hiccup for the best retail growth story we rate.” Barclays Capital’s Michael Lasser called the setback “a pause in the cycle, not in the growth story.”

If you believe that sentiment, the shares may be a bargain. The stock is trading at around $21.50, down 13 percent since the day before last month’s earnings release.

“We think the stock’s punitive response presents an opportunity to accumulate a position,” Lasser said in his report.

But there’s another camp operating largely in the shadows of Wall Street that entirely disagrees. Short-sellers—investors who profit when a stock falls instead of rises—are targeting the stock in a big way. They’d amassed a 10-million-share short interest as of Nov. 30, according to FactSet Research Systems.

By some measures, HHGregg’s short interest is among the highest in all of retailing. The 10 million shares represents a whopping 51 percent of the company’s float—the number of shares outstanding and available for public trading. That’s the third-highest percentage among all New York Stock Exchange-traded firms, FactSet says.

Based on HHGregg’s average daily trading volume, it would take 20 days for short-sellers to unwind their positions—45th-longest among NYSE firms.

It’s not clear exactly why the shorts are so bearish on HHGregg. But the Indianapolis company is just the kind of firm they typically target—a retailer with an aggressive plan to take a regional chain national. Many firms pursuing that strategy struggle to replicate their early successes, and their shares eventually crater.

Wall Street analysts issuing reports in recent weeks expressed confidence that’s not in the cards for HHGregg, despite its 1.5-percent decrease in same-store sales in the quarter ended Sept. 30. They attribute the results to weakness in the overall economy and other factors, not to stumbles in new markets.

And from their perspective, other investors’ pessimism isn’t all bad. That’s because the shorts eventually have to cover their positions. If the stock rises, rather than falls, they’ll get squeezed and may rush in to buy to cut losses. That buying, in turn, drives the price even higher.

The Rhino Report, an investment newsletter, thinks HHGregg is a good stock to purchase for that very reason. It’s one of five retail stocks Rhino says could zoom higher if naysayers panic.

Centaur CEO hit with suit

Centaur CEO Rod Ratcliff and two other shareholders of the Indianapolis-based gambling company personally owe Churchill Downs Inc. $5 million and have defaulted on the debt, according to a new federal lawsuit.

The trio provided Churchill the promissory note in March 2007 in connection with Centaur’s acquisition of full ownership of the Hoosier Park horse-racing track in Anderson. Previously, the two firms had been partners, with Churchill holding the majority stake.

Times have turned tough for Centaur since. The Indianapolis company slid into bankruptcy in March, and in recent months agreed to sell its Fortune Valley Hotel & Casino west of Denver, as well as a project near Pittsburgh where it hoped to build a harness track and casino.

Those sales will leave Centaur with only Hoosier Park and its three Indiana off-track betting parlors.

In a statement, Ratcliff said he hopes the Churchill Downs dispute “will be resolved in tandem” with the company’s bankruptcy restructuring.

“Considering the long-standing relationship with Churchill Downs, I am confident this issue can be resolved amicably,” he said.

The other two defendants in the suit are Lafayette car dealer Mike Raisor and R. Michael O’Malley, a businessman living in Bonita Springs, Fla.

In a Securities and Exchange Commission filing, Churchill says it believes the amount owed is collectible.

It’s not so sure about another $15 million it is owed by Centaur itself. As part of the Hoosier Park acquisition, Centaur agreed to pay Churchill $15 million if Hoosier Park eventually won state approval to operate slot machines.

Hoosier Park won that approval three years ago, and the payment was due nearly a year ago. Churchill “has determined that collectability ... is not reasonably assured,” the SEC filing said.•

ADVERTISEMENT

Recent Articles by Greg Andrews

Comments powered by Disqus