AOL Time Warner
We are reinstating a recommended short sale of AOL-Time
Warner. Previously, we had recommended the short sale of AOL
on July 19th at a price of $11.80. On July 15th we suggested
that clients cover the short sale at a price of $10.00 for
a gain of 20.3%.
Our reasons for recommending a short sale of AOL-Time
Warner are as follows:
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- The widening probe, by the government, into the
company's accounting practices at the AOL unit of
its advertising revenues is quite serious. The essential
issue is whether the company inflated revenues. In
addition to the SEC, the Dept. of Justice has opened
a criminal probe.
- The advertising market is especially weak for online
advertisers. Additionally, AOL business is for dial-up
users and the growth is in high-speed broadband. This
is a major problem for future growth.
- AOL-Time Warner still has to resolve the issue
of paying AT&T for its 29% position in Time Warner
Entertainment. It is estimated that the 29% position
is valued at $2-3 billion.
- We believe the outlook for AOL-Time Warner is neutral
at best and the company and stock is postured for
negative surprise.
- Technically, if AOL closes below $10.00 per share
(a key support level), short sellers and institutions
may start hammering the stock down.
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NOTE: Back in April our Firm saw a similar trading
pattern with EMC. Shortly after EMC closed below $10.00, the
stock got pounded down to $6.00. At that point short sellers
covered their positions (locking in HUGE profits) and ran
the stock back to $10.
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