Level 3 has reached a new 3.
Not only does its stock trade for considerably less than $3, but the Broomfield-based telecommunications company was the third-most shorted stock on the Nasdaq stock market according to May 15 data from Bloomberg News.
The most shorted was the Nasdaq itself via the Nasdaq 100 Trust, a tracking stock that follows the 100 largest companies on the exchange.
The second-most shorted was stock of Sirius Satellite Radio, which has been taking a beating from its competitor, XM Satellite Radio.
To short stock is to place a bet against the company. And in shorting, investors sell a stock before they buy it.
To do this, they borrow shares from brokerages. Then they immediately sell the borrowed shares in hopes of buying them back at a lower price.
The more their stocks plummet, the more short-sellers profit.
“If the company goes bankrupt, it’s pure cash,” said Dylan Wetherill, founder of ShortSqueeze.com, which provides data to short sellers.
According to ShortSqueeze.com, Level 3 ranks in the 96th percentile of all companies on the Nasdaq, New York and American stock exchanges in two key short-seller metrics:
1) The percentage of available stock on the market that is held in short positions, which is more than 16 percent.
2) The number of days it would take all short-sellers to buy back their stocks given average trading volume, which is 19 days.
Most short-sellers are sophisticated, Wetherill says. So the smart money is betting that debt-ridden Level 3 is closer to a disaster than a miraculous turnaround.
Level 3 – which spent more than $14 billion building a fiber-optic telecommunications network – saw its stock hit $130 in March 2000. Back then, too many people were betting that telecommunications would keep growing forever. The market has long since set these people straight on this notion.
Earlier this month, Level 3 stock hit a low of $1.55. It has since surged, closing at $2.01 Thursday.
The recent bounce began after a ruling from the Federal Communications Commission that directed providers of Internet telephone service to connect their subscribers to emergency 911 telephone networks. Level 3 is poised to capitalize on this trend. Short-sellers are not. But the spike didn’t rattle them, judging by the sluggish trading volume, Wetherill said.
“So far, there are no signs of them letting up,” he said.
The all-time-low stock price and the massive short position did not go unnoticed at Level 3’s annual shareholders meeting in Omaha on May 17.
“It’s frustrating. It’s disappointing. And it’s upsetting,” Level 3 CEO James Crowe said, answering shareholder questions.
If anything, Level 3 is in better shape, having recently raised $880 million in financing, Crowe said. After all, the biggest fear Level 3 investors face is that the company will run out of cash to pay its massive debts.
Crowe told shareholders he believes the giant short position is driven by traders with technical strategies. But he did not elaborate.
Crowe has been managing Level 3’s debt by issuing convertible bonds to institutional investors. These bonds will convert to stocks if Level 3’s shares rise to a certain price. But if the price does not rise, the convertibles deliver no stock.
Hedge funds and other institutional investors may be taking short positions to ensure a profit on the stock portion of their convertible bonds, said Donna Jaegers of Denver’s Janco Partners.
“Hedge funds do this on convertibles to lock in on that yield,” she said.
If this is true, Level 3 may be stuck in a vicious trading cycle. The more it uses convertibles to restructure its debts, the larger the short position grows, and the more its stock falters.
Of course, it could also be that Level 3 is running out of moves.
“They’ve managed to stay alive,” Jaegers said. “That’s more than you can say about all the other carriers that have gone into Chapter 11 (bankruptcy).”
All true. But now, the market is betting Level 3 will be next.
Al Lewis’ column appears Sunday, Tuesday and Friday. Respond to Al at denverpostbloghouse.com/lewis, 303-820-1967 or alewis@denverpost.com.
