Archive for December, 2015
Following is a quick recap of what our investigation into the situation with the spike in CVSL’s short interest has uncovered followed by a more in depth discussion –
– a share surveillance firm hired by CVSL in June uncovered a 2.1 million share “imbalance” that developed between the settlement dates of Oct. 15 and November 13.
– the stock fell nearly 40% between Oct. 15 and the reporting date of November 24 despite only positive developments for the company
– CVSL IR dept called it “in all likelihood a naked short position” … “uncovered in the days after the unrelenting downward pressure on the stock despite a very positive earnings release”
– imbalances with characteristics like this one are widely assumed by industry experts to be a naked short position.
– this imbalance did not exist on October 15, but began to accumulate into massive 2.1m position as of the November 13 settlement date.
– multiple online forums began to report the departure of six very high ranking AGEL distributors after the market closed on November 13.
– These forums’ themes included – “The future looks very bleak for Agel.” “People will leave in droves” & “Be surprised if the company is still in business in 24 months”
– All six of the departing distributors lived in Utah and the firm that Share Intel attributed the imbalance to is also based in Utah in Salt Lake City where Agel is based.
– Additional distributor departures did NOT materialize following these departures and attrition actually declined from normal levels during November
– The revenue declines that even the company expected did not materialize as November was the top revenue month of the year for Agel.
– With revenue up and commission expense way down due to the departures, Agel appears to be on the verge of providing upward lift to CVSL’s already strong company wide Q4 numbers
– It would take over 20 days of 100% short covering transactions at the avg daily volume to cover a 2.4 million share short position.
– There are only 14 full and two partial trading days until year end / quarter end and we expect CVSL to report record numbers and possibly its first profit
In June following a noticeable increase in reported short positions in its stock, CVSL hired a share surveillance firm. Share Intel uses proprietary data parsing tools that track share movement with Broker-Dealers, DTCC data and several other key share movement tracking lists to locate and determine the nature of share imbalances. No such share imbalance existed for the first five months of their engagement, but the report from November 24th that analyzes the data from the November 13 settlement date showed a very large imbalance that could be traced to a broker-dealer based in Salt Lake City, Utah, where Agel is based. The measurement period for that short position would be between October 30 and November 13 so a naked short position established between Oct. 31 and November 13 would first be detectable upon the dissemination of that information after November 24. From what we can gather through various sources, October 31 was the last day that six high ranking Agel distributors were part of the CVSL organization, as each resigned following the 31st and the news of their departures was widely kreported through multiple online direct sales news outlets after market hours on November 13.
To be very clear, we are not stating that the six departing distributors established this short position or that they tipped off speculators who then established the short position. We are simply noting the remarkable coincidences between the timing of the dissemination of the news of their departures occurring after the market closed on the settlement date where the the large short position would be counted (but not disseminated for another 11 days and then it would come over Thanksgiving holidays), the area they are all from being where the broker-dealer is based that reported the “imbalance”, the extreme measures taken to make the short position undetectable and the other things that can be surmised when you read the multiple direct sales news outlets reporting of the situation. These articles made it appear that AGEL would not be able to stay in business much longer due to the departure of these high ranking distributors with quotes like “The future looks very bleak for Agel“, suggestions that other Agel distributors might start to “… leave in droves” which would presumably cripple Agel and make true the dire predictions about the company’s outright survival with “Be surprised if the company is still in business in 24 months.” . If the mass departure of distributors and other negative scenarios discussed in these articles were to occur, it would have seriously major negative implications and potentially put one of CVSL’s largest divisions into a death spiral. Obviously such a scenario would have a very negative impact on CVSL’s share price and a 2.1 million share position that is established between $1.50 and $1.70 could make over a million dollars for its holders if the stock could be pushed back to the lows it reached earlier this year and $2 million or more if they could “break the buck” and then buy to cover. And the way the position was established, it would be largely undetectable (except in the scenario where the firm had a share surveillance firm tracking all share activity prior to the beginning of their attempt). Lots of coincidences, but we do not point out all of these coincidences to suggest that any particular person or persons is behind the short position, we do not even view that as particularly relevant. We do this to make the point that in all likelihood this short position was established based on knowledge of these departures and the theory that these departures would lead to more departures and this would have a severe negative impact on Agel’s Q4 performance and that this would negatively impact CVSL’s earnings for Q4 and beyond. So regardless who established the short bet against CVSL, we do believe that all the coincidences of time, place and people point to the departures and likely negative aftermath’s impact on CVSL as the theory upon which the short bet was made.
The theory behind the establishment of this short position actually made sense when you consider how this type of thing usually unfolds, as distributors often follow along when the top leadership moves to another company as has happened here. That is a recurring theme in the direct sales industry, but it simply just did not happen this time as Agel CEO Jeff Higginson has indicated that November was the best month of the year so far. Now these speculators are holding a short position of 2.1 million shares against a back drop of a reported short interest that has swelled to over 300,000 shares in a stock that trades only 120,000 shares per day on average. If every trade of every trading day the rest of the year were a short covering transaction at that average volume, it would still take over 20 trading days to cover the entire position. But there are only 14 full and two partial trading days left in the year and many of those days are very low volume due to the holidays. This short position simply can not be covered prior to year end without driving the price significantly higher and all indications we are getting from the company are that they are on the verge of reporting a record revenue quarter and possibly the first GAAP profit in the history of the company. Every specific detail we pressed on in the call indicated that things have continued to go very well since the quarterly conference call, a call where CEO John Rochon said “We expect a very strong Q4”.
In summary, we have now confirmed through all available resources that there is now a short position of 2.4 million+ shares in CVSL. It appears that the short sellers made this bet based on a theory did not pan out and now they must buy to cover the 2.4 million share position before the Q4 results are announced or they will be risking unlimited losses. CVSL uses a daily P&L system that would conceivably allow them to pre-announce earnings for Q4 at the end of December or in early January. We hope that the company will take the opportunity to do this so that investors will see that there is nothing negative going on with the company and that the stock price declines in the face of CVSL’s increasingly strong operating results are strictly due to the speculators selling shares they do not own. Additionally, we wonder if CVSL sales reps, employees, directors etc. might start to buy shares with the stock this low, maybe even because they realize that their company is under attack by those who would try to profit by bringing them down. CVSL shares are dirt cheap by any financial measure right now and objectively very cheap verses the valuation of similar (but slower growing) companies in the space due solely to the downward push of the short sellers. We believe buyers of CVSL shares at current levels could make 100% or more within 6-12 months and possibly exponential gains 12-18 months out. But those exponential returns could happen in a matter of days if the entire short position has to be covered over a few days due to a spike the in price instead of the 50-60 trading days it would likely take to buy to cover 2.4 million+ shares under normal circumstances.
A quick update on three of our focus stocks, Remark Media, Inuvo and CVSL.
A Groove participant attended the LD Micro conference presentations for two of our focus stocks this week (Remark Media and Inuvo) and also had one on one meetings with executives of each.
For Remark the meeting was with CEO Kai-Shing Tao and CFO Doug Osrow. We were very encouraged by the tone and sense that this is a company with many potential catalysts over the next 12 months including –
1) Vegas.com – the opportunity to grow Vegas.com is tremendous, as the company’s ticketing and lodging businesses have been regional leaders in traffic, but lagging on converting those lookers to bookers. With some tweaks to the booking system that was being used to incorporate some of the “closing” features of a booking.com, expedia or other competitors there appears to be significant upside by simply improving the close rate. Additionally, there are numerous opportunities for partnerships and cross promotions with many other companies that want to gain as much as exposure as possible in the Vegas market, with the recently announced Lyft partnerhips being a prime example. Vegas.com is a very large business $60m+ in annual net revenue, but in many ways it had been a family run company and there are many areas where small improvements could yield big top and bottom line results.
2) Sharecare – the likelhood that the 5.2% stake in Sharecare will be monetized in 2016 is very strong. While they could not speak to the possibility of an IPO by Sharecare (due to Mr. Tao’s being on the Sharecare BOD), they did indicate that they believe that Remark will see some type of liquidity event in 2016 that allows Remark shareholders to monetize at least part of the enormous increase in Sharecare’s value that has occurred over the last few years.
3) Kan Kan has the potential to transform the company. We did not get to dive into this as much as I would have liked due to my schedule to meet with another company, but I got the sense that this represents the greatest potential Alpha from among the three being discussed here. Already live in Asia, this will be expanding significantly over the months ahead and the company apparently has gained access to social networks in Asia whose data flowing through the KanKan system will create tremendous value for advertisers.
We maintian a very positive outlook for Remark shares and will likely be aggressive buyers again when we get a chance to review a full quarter’s filings where the Vegas.com assets are included for the full Q. If the numbers fall where the historical results would suggest, Remark will be undervalued in the current $4.50 trading range.
Inuvo – we were able to attend Inuvo’s presentation as well as spend some one on one time with Inuvo CFO Wally Ruiz. We note that there appeared to be a bigger following for Inuvo this year and Mr. Ruiz’s schedule was booked with one on one meetings with interested investors. Our biggest takeaways from the presentation and conversations were –
1) Sitelinks – Inuvo’s recently launched sitelinks service seems to be catching on and the company’s salesforce is in the early stages of pushing it out to potential customers with good results thus far. We did not get a sense for the potential bottom line impact, but note that the quarter ending in three weeks will be the first full quarter since sitelinks was launched and also that Q4 is usually a seasonally strong quarter for Inuvo.
2) Acquisitions – Mr. Ruiz mentioned the acquisition earlier this year of some websites that were previously part of the company’s Partner Network. As Inuvo serves the ads that generate the revenue for the thousands of websites in the Partner Network, Inuvo has an enviable vantage point from which to view the performance and gauge the true potential for these sites. With the company’s now debt free balance sheet and liquid acquisition currency, the opportunity is there for more deals and we would not be surprised to see Inuvo accelerating its growth in 2016 with additional acquisitions.
3) New Address – Inuvo’s move to the technology park in Little Rock is stirring new excitement with existing staff and they believe this move will allow Inuvo a stronger ability to attract and retain top technology employees.
Overall, we were given a very favorable impression of how things are progressing with Inuvo and also got the sense that more investors are beginning to show more interest in the Inuvo story. While we have not been aggressive buyers north of $3, we view the intermittent pullbacks as good buying opportunities to add to your long term holdings.
CVSL – Over the course of the last week we have been digging deeper into the situation we mentioned the previous Friday about the very large naked short position. We have uncovered much more there than we could provide in a brief update like this one and we also are waiting to confirm a few specifics with the company in a call today. We should be able to provide the full update tomorrow.