The Epitomy of a Contrarian Stock Market Bet

1) I am the most heavily shorted stock on the New York Stock Exchange with over 240 million shares sold short as of May 2005, equal to 45% of my float.

2) I am the cheapest stock in terms of price-to-book ratio in the S&P 500 index, trading at less than 50% of my tangible asset value.

3) My share price was once as high as $58 in 2001, but since then my stock has dropped by 95 percent.

4) Wall Street analysts dislike my stock immensely and many have a “sell” rating on it.

5) I am in the midst of a restructuring focused on selling assets and paying down and/or refinancing debt.

6) I am Peridot Capital’s most recent purchase.

WHO AM I?

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13 Thoughts on “The Epitomy of a Contrarian Stock Market Bet

  1. RC Swanson on June 21, 2005 at 1:08 AM said:

    calpine.

  2. CALPINE

  3. Anonymous on June 22, 2005 at 8:27 AM said:

    i guessed the same as the others: calpine. however, i don’t think the restructuring would be as important as replacing management. that would be a catalyst.

  4. Chad Brand on June 22, 2005 at 8:33 AM said:

    Whenever you have a stock this cheap, it is clearly pricing in some bankruptcy risk.

    A restructuring of the company revolving around a more focused business and less debt at lower interest rates will serve to boost the company’s financial position. Such a move, if successful, should get the company’s equity value back toward book value over time as that risk subsides, which would be very substantial.

    Management has waited too long to make needed changes, no doubt, but I like what they are doing very much.

    Full disclosure: Peridot owns January 2008 calls and common shares of Calpine (CPN).

  5. Gotti on June 22, 2005 at 9:44 AM said:

    Calls and common? No hedge there at all? An unusual amount of faith for Peridot to place in a bankruptcy risk.

  6. Chad Brand on June 22, 2005 at 10:14 AM said:

    The calls are obviously a very aggressive way to play a CPN turnaround. So, how I will get exposure to the name will depend on what risk profile each client has.

    Most aggressive would be the calls, then the common stock. For less aggressive investors, Calpine also has some very attractive bonds that yield over 10 percent. I haven’t bought any for Peridot’s corporate bond assets yet, but they are attractive as well.

    As for the bankruptcy risk, I am obviously not in the camp that feels that is a real possibility, so no hedges are in place.

  7. Bill R. on June 26, 2005 at 9:20 PM said:

    I would think bankruptcy was a real possibility here.

    Current liabilities are 50x TTM operating cash flow. Total liabilities are 300x TTM OCF. Interest payments eat up over 90% of the TTM OCF+InterestPayments. The current liability to equity ratio is decreasing. They wouldn’t recognize positive free cash if they saw it, it’s been so long since they’ve seen it. Five consecutive years of issuing more debt than they’ve paid.

    I wouldn’t be caught dead buying or shorting this stock. As heavily shorted as it is, one could easily get killed in the squeeze.

    Just my two cents.

  8. Chad Brand on June 27, 2005 at 10:07 AM said:

    Those stats are all in the past. After selling or shutting low margins non-core operations, and reducing debt by $3 billion, I think they’ll be in much better shape financially. I would wait to judge their finances until the restructuring plan is complete.

    You are definitely right about the possibility of a massive short squeeze, and I hope we get one.

    Unless their asset values are grossly overstated, which we’ll find out as they continue asset sales, the company is worth far more than $1.8 billion in my opinion.

  9. Dapper Dan on July 1, 2005 at 10:34 AM said:

    Agree w/ cb. the $3B debt reduction plan is 2/3rds done, they received better than expected prices and got done 18 months ahead of schedule. It’s unfortunate they’ve had to sell their E&P assets as they were one of the few highlights currently but selling sometimes prized assets is the nature of distressed securities. They could be doing worse things then buying back high coupon debt at steep discounts, as they have done over the last few months. California is still power short in the long run and the entire infrastructure still needs to be overhauled. The biggest hindrance to improving profitability is the high price they need to pay for gas.

  10. Bill R. on August 3, 2005 at 7:07 AM said:

    Well, they really blew up their earnings from the estimates, but in the wrong direction. Widening loss pretty much eliminated all the gains since the last time CPN was discussed.

    Did you take any profits in the interim?

    Have you reviewed the quarterly filing and do you still think bankruptcy is “not a real possibility here?”

  11. Chad Brand on August 3, 2005 at 8:05 AM said:

    Today’s losses have merely eliminated yesterday’s gains, so that’s not a big deal. The stock is up since it was mentioned, but as was indicated back then, this is a long-term turnaround situation. As a result, I have not taken any profits as of yet.

    They are recapitalizing the entire company and this process is far from complete. I am not all too concerned with financial results from 3 months ago.

    This is not to say they aren’t poor, because clearly they are, but the point of investing here, from my perspective, has to do with what their asset and liability picture could look like a year from now.

  12. Bill R on August 10, 2005 at 12:16 PM said:

    “Calpine’s Filing Confirms Cash Crunch

    By William Gabrielski

    About this article:
    The most interesting tidbit from the 10-Q is that the company has negative $555 million in working capital. . Not one analyst asked what the implications of this negative working capital are for Calpine’s operations. . My calculations indicate that Calpine will be fresh out of cash by the end of the year. . “

    I still think bankruptcy is a real possibility here. Utilization was low in the last quarter and repairs have not been made … possibly because they lack the cash. When you’re out of cash you’re out of business …

    It might be a better deal to sell the stock and buy their bonds …

  13. Chad Brand on August 10, 2005 at 12:28 PM said:

    How that guy figures they run out of cash in the next 4 months is beyond me, he probably hasn’t done much research beyond looking at the negative working capital figure.

    As I’ve said before, I am waiting to see if they can pull off their $3 billion debt reduction plan. If they can’t, then we would have deeper issues, at which point I’d most likely buy puts to hedge the position. Their operations are around break-even, so clearly the debt issues are of utmost importance.

    As for the bonds, I agree they are much safer, and own them in less aggressive accounts.

    No doubt this is a speculative position, but as long as one doesn’t put much of their assets in such situations, you can afford to take a riskier bet here and there.

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