• Jeff Matthews

The Most Dangerous Call You Will Hear Today

Today we here at NotMakingThisUp break with a longstanding tradition of identifying “The Least Helpful Call You Will Hear Today” in order to identify a new category of Wall Street research.

We call it “The Most Dangerous Call You Will Hear Today,” and until today it has not existed for the simple reason that before the financial crisis came along and caused all manner of failing CEOs—from the lowest, least-material money-losing internet company to the whitest white-shoe Wall Street firm—to blame their own material failures on unnamed, unknown, and never-identified “short-sellers,” it seemed impossible to fathom that any thoughtful research opinion could be construed as dangerous.

Indeed, 30 years ago, when we started on Wall Street as a very junior number-cruncher in the equity research department of a large and proud Wall Street firm, our boss—a forceful, smart, hard-driving Greek—published whatever he wanted to publish, whenever he wanted to publish it.

Investment bankers and CEOs be damned.

Your editor can still picture the man waving his cigarette in the air—smoking was allowed in office buildings back then—when somebody from above tried to interfere with us, and using to remarkable effect the kind of language Lehman CEO Dick used when his firm was collapsing under the pile of bad real estate loans and bad LBO loans Fuld’s team had assembled, as depicted by Andrew Ross Sorkin in his excellent book, “Too Big to Fail.

But those days are long gone.

As commercial banks bought up investment banks, old-style research became a tool for the bankers to win new clients and pacify existing ones. Worse, even Moody’s and S&P—so-called independent ratings agencies—saw the writing on the wall, and wrote pretty much whatever their clients asked them to write. Worse still, independent research firms started getting sued merely for publishing negative research. (Next thing you know, short-sellers will be sued simply for being short-sell—oh, wait, that’s already happened….)

In light of this perverse turn of events, today’s research call from something called “WBB Securities” looks even more remarkable than it might otherwise appear.

For WBB Securities has, we are informed, slapped not merely a “Sell” rating on a stock—shocking as that would be—but a “Sell Short” rating, at least according to the indispensible Briefing.com:

Electro Optical Sciences downgraded to Sell Short at WBB Securities; tgt lowered to $5 (9.16)

WBB Securities downgrades MELA to Sell Short from Sell and lowers their tgt to $5 from $7.25 saying while they find MELA’s candid assessment of the difficulties assailing the FDA and companies before the agency refreshing, they also find it cause for concern in assessing the chances and delays in approval of a PMA product when, according to management, this is “not what’s supposed to happen” in the approval process. Firm says as a result of this FDA response and a re-assessment of their modeling of MELA, they are lowering their rating. Now, Electro Optical is not your garden-variety money-losing investment bank or internet retailer. Electro Optical has developed a gizmo that illuminates potential melanomas on the skin: hence the company’s stock ticker is “MELA.” And melanoma is bad—very bad. Most people have no idea how bad a malignant melanoma can be. (How otherwise to explain the current younger generation’s infatuation with a new brand of cigarette known as The Tanning Salon?) Electro Optical’s gizmo is a bit like an ultra-sound device that uses light waves to detect “suspicious pigmented skin lesions” for possible biopsy. It’s a great idea, replacing as it would the inefficient method by which a harried, time-short doctor merely looks over the skin.

The market potential for such a product could be enormous, but for reasons we here at NotMakingThisUp don’t grasp—and to be clear, we have absolutely no interest in the stock as a long or a short—the company has encountered a bumpy road to FDA approval, as yesterday’s news demonstrates.

Whatever the problem with the gizmo itself, the company, according to our Bloomberg, has a debt-free balance sheet and close to $30 million in cash. Unfortunately it’s lost roughly $18 million in each of the last two years while pursuing regulatory approval.

That’s what an analyst-friend of ours used to call “a spicy meatball.”

And while slapping a “Sell” rating on any stock is difficult enough these days—courting as it does the wrath of investment bankers and CEOs—putting a “Short-Sell” rating on anything short of an already-bankrupt company in a world in which short-sellers have been blamed for the failings of the men who ran Lehman, Bear Stearns, Fannie Mae, Freddie Mac, Countrywide Credit, AIG, GE, Merrill Lynch and Wachovia, not to mention the entire country of Greece, is almost inconceivable.

Which is why we nominate the WBB rating on MELA The Most Dangerous Call You Will Hear Today.

Jeff Matthews I Am Not Making This Up

© 2010 NotMakingThisUp, LLC

The content contained in this blog represents only the opinions of Mr. Matthews, who also acts as an advisor: clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes investment advice, and should never be relied on in making an investment decision, ever. Also, this blog is not a solicitation of business: all inquiries will be ignored. The content herein is intended solely for the entertainment of the reader, and the author.

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The content contained in this blog represents only the opinions of Mr. Matthews. This commentary in no way constitutes investment advice. It should never be relied on in making an investment decision, ever. The content herein is intended solely for the entertainment of the reader, and the author.

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