NWA Stock Short-Sellers are Winners

Who are the post-bankruptcy winners and losers among investors in Northwest Airlines stock?

Short-sellers are likely to end up as the big winners.

The losers appear to be two funds that picked up big chunks of the stock shortly before the company filed, as well as the analysts who touted the stock and the investors who believed them.

Northwest filed for a Chapter 11 bankruptcy reorganization on Sept. 14.

Two days before the filing, the stock closed at $3.31. But Sept. 13, as word of the filing began leaking, it skidded 52.6 percent to $1.57.

By the end of the week, it was down to 90 cents. This week, it fell another 19 cents to close Friday at 71 cents.

For the short-sellers, this may have been a golden opportunity. These investors bet on stocks they view as overpriced. They borrow a stock when its price is high, sell it before the price falls and buy it back after the decline. Then they walk off with the difference, minus commissions.

The most recent short-selling report from the Nasdaq Stock Market showed that Northwest was among the biggest winners for short-sellers. The number of Northwest shares sold short shot up 62 percent this year through Aug. 10, with activity particularly intense in the month ended Aug. 10.

A fresh accounting of short selling in Northwest stock will arrive Monday, when Nasdaq officials release their monthly report.

On the losing side of the ledger are two funds that bought the stock earlier this summer, when some in the investment community thought the carrier could avoid Chapter 11.

Connecticut-based Ziff Asset Management acquired 5.27 million shares of the stock — 6 percent of the outstanding shares — on Aug. 10. The closing price that day was $4.21.

S.A.C. Capital Management, based in the British West Indies, acquired 4.4 million shares on July 20. Then, the stock closed at $4.78.

Now, about those analysts: According to Bloomberg News Service, four of the nine analysts who follow Northwest had a "buy" or equivalent ranking on the stock on the day the company filed for bankruptcy.

Several analysts issued relatively cheery reports about Northwest in the days leading up to the bankruptcy.

On Sept. 6, Prudential analysts issued a report rating the stock a buy and predicted that hurricane-related fuel price increases would not push the carrier into bankruptcy.

Four days earlier, Morgan Stanley and Merrill Lynch also put out buy reports on Northwest stock. Morgan Stanley titled its report "A Bit Darker Before the Dawn."

As Standard & Poor's equity analyst Jim Corridore told Bloomberg, "There was an uncommon disconnect with what was happening with Northwest and what investors were thinking was going to happen."

In retrospect, it's not surprising that the stock has fallen so much since word of the Chapter 11 got out. Shareholders generally fare poorly in such litigation.

Philanthropic circles in the Twin Cities area are abuzz over the news that individuals will be allowed to deduct 100 percent of cash contributions to most charities if the gift is made between Aug. 28 and the end of the year. Normally, donors have been limited to a 50 percent deduction for donations.

This provision is contained in the Katrina Emergency Tax Relief Act of 2005, which was sent to President Bush on Wednesday. The gifts do not have to be limited to Katrina relief efforts.

"We believe this is the first time in 35 years that the Congress has allowed the full deductibility of charitable contributions without limitations," the Tax News Bulletin reported this week.

Adds Jerry Geis, a tax attorney at Briggs & Morgan in St. Paul: "It's a good thing at the federal level and should be adopted by Minnesota to be effective this year."

The Minnesota Business Partnership says 45 of its members have contributed $57 million in cash, in-kind giving or in employee matching funds to the Katrina relief efforts.

That brings the partnership three-fourths of the way to the $75 million hurricane relief goal set forth for its members earlier this month by Gov. Tim Pawlenty.

Dave Beal can be reached at [email protected] or 651-228-5429.

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