Sunday, December 9, 2012

Applying Short Sale Framework to Happiness Epxress

Company Description:
Happiness express sells toys and its product is Mighty Morphin Power Rangers.

I. Short Sale Categories:
 Companies that will be affected in a significant way by changing external events. In Happiness Express's case, the fad of its Mighty Morphin Power Rangers has peaked.

II. Signs of Potential Short Candidates:
1. Depending on 1 product Mighty Morphin Power Rangers.
2. Previous sales before Mighty Morphin Power Rangers also concentrated in few products, the licenses of some of which were nonexclusive.
3. Insiders were selling.
4. Cash was burning.

III Research the Short Candidates:
1. Off-Balance sheet purchase agreement of $2 million and minimum executive compensation of $900,000.
2. Inventory soared.
3. Cash kept burning.

NOTE: Valuation, did not signal a safe and secure short. This is, in fact a value trap back in 1995. Earnings for the March 1995 fiscal year were expected to be $1.10, up almost 50% from the previous year, with at least another 50% rise expected for fiscal 1996. That meant the stock was selling at less than 9 times forwarding earnings. It took a year and a half before the stock plummeted.

1 comment:

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