Stock Traders Press

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:

  • 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.

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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