Tuesday, October 7, 2014

Opened Lake Short. Position Trade. Short Hypothesis.

The "ebola stocks" have been running as of late  and I've participated with TKMR.  As much as I've enjoyed this type of run, it gets to a point where things start to get out of hand.  LAKE.  Lake makes a variety of protective clothing including Hazmat Suits, which can be used to protect health officials against Ebola.  So naturally it puts out a press release that says it has suits for Ebola and it becomes part of the Ebola stock sector and it's stock rockets forward. 

Today,,TKMR pulled back hard but  LAKE puts on over 13% today.  Although I'm normally hesitant to short moves like, this this is the 3rd pop and is  a sign of tiredness. I shorted at 10.30. I started small as I'll accumulate over the next few days to weeks.  I believe this retraces to 7. 

Here is what I see as the negatives:

  • There is Nothing Unique.  They make Hazmat suits.  So do dozens of other companies, such as  Dupont 
  • Weak financials
    • Company reported weakening U.S. sales last quarter:

"Q. What happened to sales in the U.S., it sounds like that was disappointing?
Christopher J. Ryan - President and CEOThey were a little disappointing on -- there were two -- three divisions that were up and two divisions that were down. The two divisions that were down were down more than the three divisions that were up." 

  • Focus of management   At the q2 CC. The CEO was discussing  about Yahoo message board posters 
  • "we have had a poster on the Yahoo message board, which has generated several inquiries from investors. Let me say this poster has long ago given up any pretense of being a concerned investor and is clearly a small group of former employees, who were former for good reason."
When a CEO of a company is reviewing the message boards on his company and then commenting about them during conference calls, it is typically not a good sign.  Perhaps, their efforts would be better spent trying to revive their sales instead of browsing their message boards.

  • Widespread false belief of government award
    •  Many people on stocktwits and twitter have stated that LAKE has a confirmed order for 160,000 suits.    Nope. 
    •  The state department is seeking bids for hazmat suits but there has been no award and certainly no award to LAKE.  Lake mention the bid in a press release and many assumed that they were awarded the contract. 
  • In the company's own words:
"the  materiality of this incremental demand is yet to be determined but rest assured that we have the appropriately qualified and specified suits and the manufacturing capacity to supply these garments."
 Great they have the suits, the question is and always was how many will be bought. 

  •  No record of successful sales to U.S. Government
    • Government contracts are  a matter of public record.  
      •  LAKE's government contracts to date have totaled: $21,370 in lifetime contracts.   Wow!  That's worth a 50% increase in a week. 
  • Biggest Shareholders sold out everything. 
  • Outrageous hype with leaders beginning to fail.  TKMR down from 30 to 22. 

  • Positives
  • Ebola has hype and the story could get hotter  before it flames out.
  • Tiny float. (a double edge sword of course)
  • Minimal Dilution to date
  • 5,358,509 shares as of July 2014


    I've seen this scenario play out dozens of times. This will drop back to 5 or lower.  There are too many negatives.  The question is now only a matter of timing.  

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