UARM

[Groty]

I started building a short position in this one today. Here's the story:

Currently trades at $35, or an increase of 170% from the IPO price of $13 just six months ago. At $35, it trades at 65x expected '06 earnings and 50x '07 earnings. Pretty rich valuation for a garment company. But valuation alone isn't reason enough to short a stock.

The insiders were "locked up" and restricted from selling any stock for six months after the IPO date (this is a standard practice). That six month lock-up period just passed. Goldman Sachs, who was the lead manager of the IPO, was retained by the insiders to do a secondary so they could dump a big chunk of the previously restricted stock at $34. The founder cashed out for $51,000,000. Three people who share his last name all became instant multi-millionaires. The venture capital firm that funded UARM in its early days sold every single share it owned in the secondary. All told, the insiders sold about 15% of the total shares outstanding as soon as practical after the lock-up expired. As a public shareholder, you hate to see the insiders head for the exits as soon as they can. But it is probably not reason enough to make it a good short. After all, you can't blame the founder and his family for wanting to diversify. And the founder sold only 10% of the stock he owned.

Here's what pushed me pull the trigger and short it. They reported an absolutely blow-out first quarter number. Goldman had estimates at $0.06 and UARM printed $0.18. How convenient to blow away estimates right before the lock up expires and insiders get to sell over $245,000,000 of stock to the public. And when you compare revenue growth from the 4th quarter of '05 to the 1st quarter of '06, revenues increased only 0.5% quarter over quarter. Yet A/R increased 19% from December to March. When A/R growth occurs at a much faster clip than revenue growth, it could mean these guys stuffed the channel. (A Motely Fool article alerted me to the potentil channel stuffing).

If Wal-Mart's weak same store sales numbers suggest a general slowdown in consumer spending (which I believe), and if these guys really did push excess product into the distribution channel (perhaps to make their numbers and support the stock price just prior to the lock-up expiration??), then I'm anticipating a revenue/earnings miss in the next quarter or two. If that happens, and considering the super rich valuation, the stock will get spanked hard.

Prospectus relating to the secondary:
http://www.sec.gov/Archives/edgar/da...htm#bc72528_12

[Sniper]