It is one thing to have a large short position and have it work out favorably. It is whole another thing to cover your position for a profit and turn around and get long and have that work out as well.
Amazingly, that is exactly what Reverend Emmanuel Lemelson of Lemelson Capital Management has accomplished in the shares of World Wrestling Entertainment WWE
Making His Bear Case
Back on March 17, Lemelson stated his case for the company being overvalued. His basic premise being that the financial performance has been trending down for multiple years and that excessive dividends and losses may potentially erode its financial profile. Furthermore, he believes the execution by the management has been sub-par and consistently under delivers.
Although the market did not immediately react to the article, it did weave and bob around the $30 level for a few weeks before it suffered a huge decline on April 7 from $28.02 to $23.90. The sharp decline occurring even though the company announced that Wrestlemania 30 broke the record for the highest grossing entertainment at the Mercedes-Benz Superdome over the previous the weekend. Perhaps a classic example of “selling the news”.
Stock Declines After Earnings Beat
On May 1, the company reported 1Q2014 results that beat Wall Street estimates by a nickel (($0.11) vs. (($0.16)). However, the EPS from the same quarter last year was down a whopping 375 percent. This news pushed the issue under $20.00, a level has not seen ever since.
More Pain After Deal With NBC Cable
On May 15, a multi-year deal with NBC Universal Cable Entertainment for WWE's flagship programing came in well below Wall Street expectations and the issue was nearly cut in half the following day ($19.93 to $11.27).
This precipitous decline was exactly what Lemelson had been anticipating and used the drop to not only cover his short position, but to reverse his position and go long. As any trader or investor can attest to, covering and reversing on a profitable position is extremely difficult and does always work out their favor.
Makes His Bullish Case
Shockingly, on May 16, Lemelson announced his stake in WWE and called on the Board to pursue new management or ownership. He followed up on his bullish prognostication on June 19, while being interviewed on Benzinga's PreMarket Prep. He reiterated that the underlying business had value, but the current management had been negligent and drastic changes were called for including the possible sale of the company. At the time of his initial announcement the shares closed at $11.27 and the day he was interviewed the shares ended the session slightly higher at $11.74. Not far from the panic-selling low of $10.55 that occurred on May 16.
Company Makes Changes
Fortunately, for shareholders the company took action based on his Lemelson's suggestions. Although, there were no major changes in management and it was not put for sale, the company did reduce its staff by 7 percent and took other appropriate measures to reduce costs. These actions have unlocked some of the true “intrinsic” value in the company.
WWE, with its monopoly in the the sector, toned down its a content a bit and became a more kid-friendly and has fostered a new generation of fans in Lemelson's opinion. Despite its move to lighter content, Lemelson admits he will not be tuning in any time soon.
When being interviewed for this article and being congratulated for his bold calls, he response was simply “Glory to be God”, not taking full credit for amazing turnaround in share price of WWE. In Thursday's session, it has reached its highest level since that disastrous day in May, climbing over $15.00, trading as high as $15.38.
When pressed for a upside target for the issue, Lemelson stated he does not like place hard targets on his investments. Instead he prefers to reevaluate his stake in WWE as more fundamental information becomes available.
In the old days, when Smith Barney spoke, people used to listen. In today's market when Lemelson speaks, investors may want to listen up as well.