Genesis Puts Squeeze on Stock Bears

An investing phenomenon called a “short squeeze” has driven the price of money-losing direct marketer GenesisIntermedia Inc. of Van Nuys to record highs, sending its shares up nearly 40% in just the last five days.

Shares hit a 52-week high of $16.35 on Thursday, before settling back to close at $15.79 on Nasdaq, up 93 cents for the day. The stock has jumped 177% this year.

Although short squeezes occasionally develop in stocks, what makes this event unusual is that nearly 90% of Genesis shares are controlled by just two individuals: Saudi financier and arms merchant Adnan Khashoggi and Genesis Chief Executive Ramy El-Batrawi. The relatively small number of shares left in the hands of the trading public has magnified the effects of the squeeze.

When investors “short” a stock, they look for a company they believe has an inflated share price and is poised for a fall. They then borrow shares of the target company from brokers and sell them into the market. If the stock price goes down, the short sellers then buy stock in the market at the lower price and use it to repay the broker, pocketing the difference.

This strategy sometimes goes awry when shares of the target company rise unexpectedly. The increase sends short investors scrambling to buy shares to repay their loans, often leading to further escalation in the stock price.

That is what has happened at Genesis, said Mike Roesler, an analyst with New York brokerage Taglich Brothers Inc.

“The price of these shares can’t be based on the fundamentals of this company,” said Roesler, who issued a “sell” warning March 28.

“Even back then, I was surprised at where they were trading, because all of the other Internet incubators had cratered,” Roesler said.

When Roesler looked at the company, he said he discovered that it is essentially “a private company rather than a public stock.”

As president and a director of Ultimate Holdings Ltd. of Hamilton, Bermuda, Khashoggi controls more than 45% of Genesis shares. Ultimate also is Genesis’ biggest creditor, lending the company close to $50 million. In total, Khashoggi, El-Batrawi and two other executives control 92% of Genesis’ 21.4 million shares.

Khashoggi, 65, is a controversial millionaire known for his role as a middleman in the Reagan administration’s arms sales to Iran. In 1997, the Economic Crimes Investigation Division in Thailand issued an arrest warrant for Khashoggi, charging that he embezzled $64 million from the Bangkok Bank of Commerce, which was pushed under by bad loans.

Until three weeks ago, Genesis ended its name with dot-com. However, the company dropped the moniker to more accurately reflect its business--85% of its $42.3 million in revenue last year came from telemarketing sales of its line of self-help videos and diet pills and from fees derived for telemarketing products of other companies. Another 10% came from its Car Rental Direct, which is a small chain of car rental outlets in Southern California and Arizona that targets clients whose cars have been stolen or are in the shop for collision repairs.

Just a tiny portion of its revenue comes from the Internet, mostly through its Centerlinq shopping mall kiosks that display video advertising for movies and video games.

Genesis posted a loss of $33.5 million in 2000, compared with a loss of $8.3 million in the previous year.

Roesler said he believes that the number of shares borrowed and sold by short investors is greater than the number of shares held by Khashoggi and company insiders.

That could push the shares even higher if more short investors are forced to buy shares--at a loss--to make good on their loans, Roesler said. But as that buying pressure subsides, the share price could drop sharply.

“It won’t be pretty when it happens,” he said.

The company might have contributed to the squeeze when El-Batrawi sent an April 25 letter to shareholders complaining about the short investors. In his letter, El-Batrawi noted that borrowed shares come from individual holdings held in brokerage accounts in what is commonly known as the street name.

He asked shareholders to contact their brokers and have the shares put into cash accounts, where brokers would be unable to lend them to short sellers.

“If enough stock is taken out of street name and margin accounts, short sellers will have difficulty maintaining the current volume of short sales,” El-Batrawi wrote.

“I think that after our chairman sent out his letter, our shareholders started to take possession of some of their shares, forcing the shorts to cover their positions,” said Douglas Jacobson, the company’s chief financial officer. “There also may be upward pressure on the stock from people seeing the letter and then buying in anticipation that the short squeeze will get more dramatic.”

Indeed, Jacobson conceded that Khashoggi might be among those investors and might eventually sell shares to bring his holding closer to the third of the company he owned previously.

According to documents filed with the Securities and Exchange Commission, Khashoggi purchased more than 60,000 shares at about $11.30 each since El-Batrawi’s letter.

“It could end up being very good for him to have the shorts buy back shares from him,” Jacobson said.

Though Jacobson said he believes the shares could ultimately be worth more than what they are currently trading at, he said there is some concern at the company that a precipitous drop could occur.

Roesler noted that without the squeeze, there is not much to distinguish Genesis from other companies that have attempted to develop a smorgasbord of Internet businesses. He said the company has a lot of debt and less than $2 million in cash. One factor detracting from the value of the company is that shares are concentrated with just two individuals, providing minority shareholders little opportunity to influence Genesis’ operations.

Khashoggi is the brother of Essam Khashoggi, chairman of EarthShell Corp., a Santa Barbara company that has seen its share price gyrate in recent months on its efforts to sell McDonald’s a biodegradable container for the Big Mac hamburger. In SEC documents, Adnan Khashoggi lists his principal office as Alnaser Trading Industries in Saudi Arabia.

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Squeeze Play

Shares of GenesisIntermedia have surged as some traders who bet on a falling price

have been forced to pull their bets.

Thursday: $15.79, up $0.93

GenesisIntermedia shares, daily closes on Nasdaq

Source: Bloomberg News