Thursday, August 10, 2006

Sharesleuth and Xethanol

By now many of you probably have heard of Mark Cuban's Sharesleuth.com. It has been widely reported (see Financial Rounds, Cuban's own BlogMaverick, and Gary Weiss's blog).

If you have not seen the site, go and see for yourself!

What is it? From ShareSleuth itself:
"Call it journalism. Call it investigative blogging. Call it what you will.

More than 13,000 companies are listed on U.S. stock exchanges. Analysts for brokerages and independent research firms track fewer than half of them. Overburdened examiners at the Securities and Exchange Commission review only a fraction of the filings that come their way.

If you’ve spent any time digging through muck and rot in the lower reaches of the stock market, you know that many investment opportunities are not what they seem, and that some companies are the creation of predators and pretenders.

Sharesleuth.com aims to create a new line of defense by using investigative journalism techniques and a worldwide network of amateur and professional stock detectives to identify suspect companies."

What makes this particularly interesting is that they are also going to trade on their analysis prior to publishing. Essentially this plan gives Cuban both the incentive to find information as well as a soapbox on which to shout the findings to the world.

This has sparked a mild controversy (see Gary Weiss, as well as comments on Cuban's BlogMaverick) in spite of the disclosure of what they are doing (i.e. trading on it), which is not journalism.

Anyways, earlier this week Sharesleuth made their first publication coming out harshly against Xethanol(XNL). Sharesleuth claims that the firm is dramatically overvalued and that its reported leadership position in the field of ethanol production is largely just hype. The stock price has been falling for sometime prior to the publciation, so the direct effect is difficult to guage, but as Financial Rounds reported, it fell by 12% on the first day after Sharesleuth's publication. It has since fallen even further and as I write this it is down about 20% and about a third since Friday.

So far so good. However, what makes this even more interesting (or controversial if you prefer) is that Cuban had shorted the shares not in the days leading up to publication, but back in May! (again this is perfectly legal, as it is disclosed, but still interesting). Moreover he said he would like to short more but has been unable to borrow more shares to short.

Cuban:
"I am short 10,000 shares of Xethanol. I would like to short more, but I haven’t been able to borrow any more. I am currently in the money on the shares.

I am also short approximately 25,000 shares of UTEK because of its relationship to Xethanol. I have tried to short more, but have been unable to borrow the stock."

It will be very interesting to watch what firms are listed in coming months and whether the trades are made just prior to the announcement or months before. Stay tuned.

Ideas for class usage:
  1. Discuss the fact that many stocks do not have analysts and what this might imply for market efficiency as well as risk premiums.
  2. Ask whether Cuban's trading would this be a problem if the positions were not disclosed? (for instance if a WSJ reporter traded prior to publication--see the Winans' case).
  3. The speed of reaction to the Sharesleuth article.
  4. The long-run impact (do managers behave more in shareholder interest etc) on XNL.
  5. The role of the financial media as monitors and conflicts.
  6. How short selling works and how the lack of shares to short can lead to mispricing (see Lamont and Thaler, and Lamont).

2 comments:

Lucy said...

I do not believe that there is a problem with the fact that there are not available shares for borrowing. I think that Xethanol is a very good case study.

Anonymous said...

Maybe Mark Cuban is going to buy up the botomed out value and bring good management. Some same the technology is promising. Maybe management needs overhauled.