Archive for April, 2017
Remark shares should move significantly higher this week, starting what we believe will be a significant long term uptrend. The reversal began this past week with a move higher that we expect to gain steam this week in part due to a short squeeze caused by the company’s name change / cusip change that became effective as of Thursday. As we discussed earlier last week, the cusip change will require all of the old Remark Media shares to be exchanged for the new Remark Holdings shares. We believe this will cause some near term displacement for the holders of what we believe could be a fairly substantial naked short position, as we believe they will have to purchase shares on the open market this week. Adding to what could be much more aggressive buying than this stock has seen in awhile is a reported short interest that is the highest in Remark company history. For those who have profited from the Remark trade on the short side, this week’s reversal makes it more likely that the money to be made on the Remark trade will be on the long side at least in the near term. We believe a significant portion of the open short interest will be either covered or boxed this week and in either scenario, it will significantly boost the volume on the buy side.
In addition to the buying we should see from those who previously sold the stock short, we think other significant buyers will be in the market this week –
1) Remark Itself – Remark’s board authorized a buyback of up to 15% of the shares outstanding. Bears say the company will not actually do it. We believe that they have not used it yet because they couldn’t and remain within the safe harbor restrictions of Rule 10b-18, because executing a buyback in the days leading up to a corporate action like a name change or a cusip change might be perceived as manipulative. Now that the cusip/name change is complete (as of Thursday) the company is well within a safe harbor to make share purchases. We believe they absolutely should and we believe that will start this week and likely continue through the end of the month or whatever turns out to be the 10th day prior to the company reporting Q1.
One other thought on this – Remark is 50% owned by its CEO and two large institutional investors, so 15% of the shares outstanding amounts to over 30% of the public float. Remark is a stock that has traded an average of only 60,000 shares per day and much less than that on many recent days so it is a very thinly traded stock in addition to having a very small public float. ANY uptick in buying interest would likely push the shares higher and the stock moving higher will increase the urgency of shorts and the other buyers mentioned below.
2) Long Fence Sitters – many investors in our own community have watched Remark with fascination without pulling the trigger to actually buy shares because it was perceived as a “broken stock”. No matter the gravity of the good news released, the short sellers would quickly jump on it and pound the price back lower. However, the company’s newly aggressive stance has changed that outlook significantly and many of those watching from the sidelines started buying again late last week. With just that small uptick in buying interest, the shares rallied over 20%. We think there will be much more of that this week.
3) Traders – We will be surprised if there is not significant interest and involvement from short term traders this week. Traders beat the bushes to find a “situation” like we have with Remark this week and many others may be drawn in by the price action and momentum.
In addition to the uber bullish near term picture, we think this move could have some legs due to several factors we see materializing –
1) Marketplace Recognition of KanKan – On the most recent conference call, the company indicated that its KanKan Big Data AI/Machine Learning division’s first product – a credit scoring service to serve the nascent but rapidly expanding market for Chinese consumer lending – is gaining traction and that they expect it to contribute $5m in revenue in the current calendar year. When pressed on that figure in the Q & A, CFO Doug Osrow indicated that they actually expect the figure to come in higher than that, they just wanted to provide an official estimate that they were certain they would achieve. Additionally, management indicated the company is in the final testing stages of rolling out a second product based on this internally developed technology and that a third was already in the works. The bottom line here is that KanKan is a business that is quickly transitioning from a development cost center to a rapidly growing producer of revenue with very high margins that is targeting an addressable market that could generate hundreds of millions and potentially many billions of dollars long term.
2) There have been rumors over the last few weeks of a transaction in progress that would create significant liquidity for Remark through the sale of its very valuable but non core domain portfolio. The chatter has the company taking down something in the range of 8 figures and that a deal could be announced over the next few weeks. While we have no information beyond what is in the public realm on that, we note that the IRS.com domain alone once fetched $12.5m at aucttion and its Banks.com, Bikini.com and several income tax related domains might also draw considerable interest from multiple bidders.
3) The Sharecare holding remains a tremendous alpha opportunity. The discovery last week of a long term health care industry work in progress at Apple in addition to significant health care industry initiatives at Google require that we consider the possibility that Sharecare may not go public after all. Should that turn out to be the case, we have to think that its acquisition by one of these (or similar) companies would result in Remark Media instantly have an additional $50-$100m in cash. If Apple were willing to pay $3 billion to Dr Dre to get a product whose product is appealing to maybe 1% of the world’s population, what might they pay Dr. Oz for the company most likely to be the nexxus to offer products/services that will be appealing to the vast majority of the worlds population? A $2 – $3 billion buyout of Sharecare would barely warrant a footnote on the financials of Apple or Google but such a deal would add $100 – $150m to the balance sheet for Remark and we do not think a $2 billion + valuation for Sharecare would be that surprising given the potential of Sharecare’s business.
There have been several interesting developments that bear watching with Remark Media over the last couple of weeks and in particular over the last 24 hours. Several recent corporate actions lead us to believe that Remark’s executives and directors have been doing some bear watching of their own and several actions they are taking make it appear that they may be taking the fight to those betting against Remark through short sales. We believe the spike in trading volume and price going into Tuesday’s close may presage a more significant short squeeze that could be exacerbated by several actions announced by Remark.
After the market closed on Tuesday, Remark filed an 8k with more information on the name change, including an announcement of a change to the stock’s cusip number. Changing the stock cusip number results in each share with the old cusip number having to be exchanged for a share with the new cusip number, which causes each short position to have to prove the borrow. Naked short positions would be unable to comply and those positions could have to be covered by purchasing shares with the new cusip on the open market. With a low float micro cap stock like Remark that with trade volumes as low as 10,000 – 15,000 shares on recent trading days, any significant increase in buying would likely push the shares materially higher in a very short time frame.
There has been a growing suspicion among some Remark investors (including the author) that the trading in Remark stock reflected very aggressive short selling beyond that which we are seeing reported in the near record highs calculated in the Nasdaq short interest report. Today’s announcements lead us to wonder if this might be the beginning of a longer term campaign by management and the board to eradicate short selling in Remark stock. Is it a coincidence that this name and cusip change announcement was made on the day that the Nasdaq released the most recent short interest data showing REPORTED short interest to be within a few thousand shares of the highest in Remark’s corporate history? Is it a coincidence that it was also done just days after the company announced board approval to buy back up to 15% of the company’s shares outstanding, which essentially amounts to 30% of the tradeable shares? Perhaps, but at some point your wonder when the shorts will see there is very real potential for this stock to move dramatically higher in a time frame that would not allow those short positions to be covered without incurring substantial losses and choose to get on the other side of the trade.
Short sellers should also consider that there has been talk over the last few weeks of a transaction that could create near eight figure liquidity for Remark through the sale of its very valuable but non-core domain portfolio. The chatter has the company taking down something in the range of $10m and that a deal could be imminent. While we have no information beyond what is in the public realm on that, we note that the IRS.com domain alone once fetched $12.5m at auction and its Banks.com, several income tax related domains and Bikini.com might also draw considerable interest from multiple bidders.
Another potential scenario that could result in an even larger liquidity event for Remark is the monetization of some part of its 5% Sharecare stake. Management has previously indicated an intention of doing that in a time frame that would make a Q2 sale of some part of that stake well within the realm of possible outcomes. Many (including the author) believe the 5% stake in Sharecare could be worth over $50m and we believe there are multiple parties that would have a keen interest in acquiring some or all of Remark’s stake in Sharecare.
In summary, we believe we may be seeing the early stages of a long term effort by Remark Holdings management and its Board of Directors to deal with the increasingly aggressive short sellers targeting its stock. It will be interesting to see how the purchases necessitated by the cusip change over the next few days and the potential for the company to take down a substantial portion of its free trading shares may impact trading over the next few weeks.