Hollinger International Near Top Of Trajectory?

02/20/04 09:04:30 AM

by Matt Blackman

The stock of the newspaper empire led by ex-CEO Conrad Black, has done very well since March and recent speculation of a sale has driven it higher. With legal troubles looming and Black on the hot seat, could it be time to sell?

Security: HLR
Position: N/A

From a technical perspective, there are some interesting reasons why HLR may be a good short candidate. Its relative strength index (RSI) just gave another sell signal and there is strong negative divergence between the RSI and price. Of the last four highest volume days in the company's history (all of which have occurred in the last 30 days), three were down days, which is a definite bearish sign. The stock price is also in the vicinity of the all time high, which could present some serious resistance and a potential triple top reversal pattern. Confirmation will come in the form of a break in resistance levels and the longer-term trendline (dark blue line in Figure 1).

A major test will come when the stock hits its next support levels at $17.20 and $16.20, both previous tops, and the latter a 61.8% retracement to the previous all time high.

Figure 1 � Daily chart of HLR showing current price in relation to resistance and support at previous peaks (blue horizontal lines) and Fibonacci price levels (purple). Note the strong negative divergence between price and the relative strength index (RSI) and trendline from March low (dark blue).

Graphic provided by: MetaStock.

But the fundamentals provide the greatest cause for concern. The stock has been steadily moving higher on hopes that a bidding war will materialize. But a series of nasty legal battles are going on between Black and Hollinger International and shareholder suits against both were recently announced. Black resigned as CEO of Hollinger after the company alleged that he and other executives received $15.6 million in unauthorized payments, according to the Journal.

Here is a summary of the recent legal wrangling:

January 16 - The Securities Exchange Commission (SEC) files complaint on January 16, 2004 over the authorization of payments made to Black by Hollinger.

January 22 - The S&P Rating Service puts the company on CreditWatch with "negative implications." The Ontario Securities Commission (OSC) confirmed it was also investigating.

February 2 - The Louisiana Teachers Retirement System launches a suit alleging a failure to disclose the transfer of millions of dollars from Hollinger to Black.

February 11 - Journalists at the Daily and Sunday Telegraph, a major holding of the Hollinger group, vote by a large majority to support a strike.

February 17 - A class action suit launched by law offices of Charles Piven against Hollinger and both current and former officers and directors alleging violation of securities laws in issuing false and/or misleading statements. Hollinger's board alleges that payments to Black of approximately $32 million weren't authorized on February 18.

January through February - Hollinger and Black continue to battle over sale of Black's stake in the company and control to his brothers. Company adopts poison pill in an attempt to thwart sale.

February 19 - The Wall Street Journal carried seven separate Hollinger/Black stories about the payments to Black and claims that Hollinger had threatened to sue panel members investigating the payments for a total of fifty stories in the last 30 days.

So why are the corporate heads at Hollinger and Black fighting about who gets to sell the company? Earnings have been anemic at best and were negative in the last quarter (Sept. 03). It has a P/E ratio (trailing twelve months) of 146. The company lost money the previous year. It is currently priced at a whopping 24.3 times book value with free cash flow of -$1.18/share and a long-term debt to equity of 1,136% of the industry average. Even based on estimated 2004 earnings, assuming the company can achieve them under the current turmoil, forward P/E is north of 45.

On the positive side, short interest is low at 1.76% of float and insiders are not selling, unless you consider that Black is currently trying to sell his stake, which represents roughly 30% of the company's shares.

What are the assets worth in the event of a sale? At a price/book ratio of 24.3, that works out to a book value of $0.72/share. Once the smoke settles, will someone be willing to pay nearly 25 times book value to buy a company with the potential legal liability going forward?

I'll be watching for further signs of a reversal and a break of the trendline. Is it too early in the year for shorts?

SUGGESTED READING:

Brickly, Peg [2004] Ex-SEC Chmn: Black Threatened Panel Members, Wall Street Journal, Feb. 19

________ [2004] Hollinger CEO Says Payments To Black Weren't Authorized, ___________, Feb. 18

________ [2004] Hollinger CEO Says Payments To Black Weren't Authorized, ___________, Feb. 18

Dow Jones News Wire [2004] Employees At Hollinger Unit Newspaper Vote To Strike, ___________, Feb 11

Cherney, Elena [2004] Black's Lawyers Claim Directors Have a Vendetta, ____________Feb. 20

____________ [2004] Chairmain Black Countersues Hollinger Claiming 'Thievery', ___________, Feb. 4

Dummett, Ben [2004] Hollinger Intl Poison Pill Raises Stakes For Barclays, ___________, Jan. 26

Matt Blackman

Matt Blackman is a full-time technical and financial writer and trader. He produces corporate and financial newsletters, and assists clients in getting published in the mainstream media. He is the host of TradeSystemGuru.com. Matt has earned the Chartered Market Technician (CMT) designation. Find out what stocks and futures Matt is watching on Twitter at www.twitter.com/RatioTrade

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Hollinger International Near Top Of Trajectory?

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