REDF

[David Randolph]

Here's a copy of today's update on SIFY:

«We had a great rally yesterday on SIFY but then the general market tone took it down by the end of the session. Everything seems to be fine with SIFY's fundamentals, the company has great potential. But there's the general market risk.

I want to continue holding SIFY but protect myself from the general market risk in a clever way. On past updates I said the following:

I remember that when I was looking at SIFY I also read some things about REDF and thought it was incredibly expensive. Perhaps it would be a good hedge, long SIFY and short REDF. But I'm a bit afraid the stock opens with a big gap down today (on my news feeder the earnings news is right - but since these companies don't file the 10-Q report with the SEC, an erroneous press release may induce many people in error).

Since this update, SIFY went up 12.4% and REDF declined  8%.

Looking at the fundamentals of both companies, I believe this

1) If the market goes down REDF will go down much more than SIFY;
2) If the market goes up SIFY will rise much more than REDF;
3) If current trends continue, SIFY will go up and REDF will go down, making this hedge profitable in both ways.

So, I'll continue holding SIFY and will protect this investment selling REDF short.»

Therefore I'll sell REDF short around today's open, 6.66% of the 3 Stocks on Fire Portfolio as always. I don't know if the stock has an option chain, I lost the link for that info, can someone please provide it? Thanks.

Over the next updates I'll explain why REDF is a good hedge for SIFY, but you can start by comparing market cap, sales volume and earnings growth for the two companies and you will see it immediately.

[fous]

Great analysis David(applause). Im new to the wolf wave pattern that was recently introduced to many of us here at 3sof by calven. But REDF's price action looks to be forming a wolf wave in your favor



Good luck on your trade.

-fousc

[SmartWrasse]

I did not find options through a quote from fidelity. 

Are you saying you think REDF gaps down today, or is that an out dated opinion?

[David Randolph]

I did not find options through a quote from fidelity. 

Are you saying you think REDF gaps down today, or is that an out dated opinion?

It is an outdated opinion, the stock will probably open near yesterday's closing levels. That is an opinion from December the 14th, I believe, after a press release saying there was an error in REDF's EPS, you can find it on SIFY's thread.

[David Randolph]

From their latest earnings report, I see that REDF has 25,798,319 shares outstanding. That means the current market cap is 25,798,319*$19 = $490,168,061.

SIFY's market cap is 44,800,000 shares outstanding on a fully diluted basis times $10.67 = $478M.

SIFY's revenues for 2006 are expected to be higher than $100M.

REDF's revenues expected for 2006 are about $18M.

This is just a start, on further updates I'll show more evidence that REDF is way overvalued.

[berloga]

David, is it possible that SIFY's success is hauling REDF? I understand your argument, but do you have an upper limit for REDF, beyond which you'll pronounce it a rotten deal?

[David Randolph]

David, is it possible that SIFY's success is hauling REDF?

Absolutely. SIFY's rise brings attention to India and that makes REDF go up in sympathy.

I understand your argument, but do you have an upper limit for REDF, beyond which you'll pronounce it a rotten deal?

Don't forget REDF was down a lot a few days ago, so I think of the recent days as a small correction. I don't think REDF will ever close above $19.90 again (at least not in the near or medium term). If it does, we'll talk again ... also, if one day SIFY goes down 1%, I expect REDF to go down 3 to 5%.

REDF has a superior market cap than SIFY. REDF has $8.8M in cash, SIFY has $26M. Growth is about the same.

Anyway, I'm not looking to make a great trade on REDF, I'm just looking to lower the risk on SIFY's trade. I may not make as much money as if I risk it all, but if it wasn't this way maybe I would have taken profits on SIFY already, instead of letting them grow as they are.

I feel so comfortable with these two twin trades (Long SIFY, Short REDF) that I'm actually thinking of repeating this procedure more times, long a strong stock and short a weak competitor as an hedge.

[David Randolph]

I'm still asking myself if this was the reason REDF rose so much in the past:

«Correction: Earns-Rediff.com Story
Tuesday December 13, 5:48 pm ET

MENLO PARK, Calif. (AP) -- In an Oct. 24 story about Rediff.com India Ltd.'s second quarter earnings, The Associated Press erroneously reported that the company earned $1.16 per American depositary share in the period. Instead, the company earned 1.16 cents per ADS, or 1 cent after rounding.»

I don't think so, but ... the stock is so overvalued that it makes me wonder.

People on Yahoo! Boards are starting to compare both companies and asking why REDF doesn't follow SIFY with as much energy:

REDF Yahoo Boardhttp://messages.yahoo.com/bbs?.mm=FN&action=l&board=1600905325&tid=redf&sid=1600905325&mid=13430

I think it is just a matter of time before everybody else perceives the short opportunity on REDF, not long.

I'll continue holding REDF short.

[netfishmademerich]

Can't borrow shares to short this.  Whatever happened to naked shorting?  I thought that was standard procedure.

[SmartWrasse]

I was never able to get shares from fido either 

[willey]

Hi folks,

I would NOT short this stock!  It has a special "cult" following & special status in the email world.

IIJI should ( I believe ) be getting ready to challange old highs...could break thru them this time, IMO!

willey

[David Randolph]

Can't borrow shares to short this. Whatever happened to naked shorting? I thought that was standard procedure.

I was never able to get shares from fido either

It is a pity you guys can't short REDF. The more I see of it the more I get to the conclusion that this is one of the most overvalued companies you can find on the entire US market.

REDF's market cap is $497M and last year's revenues were just $12M. There's no ascending revenue trend, just an erratic chart, as you can see below:



The Price to Sales Ratio is about 29 and the industry's P/S Ratio is 3.25.

Here's a comparison between REDF and some competitors:



I'll continue holding REDF short (despite I will close SIFY's long position around today's open).

[David Randolph]

REDF short started as a long SIFY hedge, so, since I don't hold SIFY long anymore, it is right to close the REDF short trade too, right? Wrong, things evolve.

REDF short is exactly the kind of trade that I want to do at this point. I want to be a bear in the overall market and REDF is an overvalued stock due for a steep decline.

But I don't want to be long term bear trader, I need to be an active bear.

An active bear holds is shorts for as long as the stock is declining in trend terms. I define trend by the descending trend line on the chart below (the red one).

I'll continue holding REDF short for as long as the stock is set to close below the red descending trendline, which for today stands at $19.52.

[David Randolph]

REDF is acting as expected, that is, going down. If the stock breaks $18.02 on a closing basis we get further confirmation that this trade is right.

I'll continue holding REDF short for as long as the stock is set to close below the red descending trendline on the chart, which for today stands at $19.30.

Probably I'll add an oversold/overbought indicator to get out of this short trade if there's a big and sudden break, but this isn't the time, yet, to think about it.

[willey]

Hi David,

If your short doesn't work out ( my belief ) a measured move in REDF works out to $23 to $25, short term - but what do I know?

Hidden hands are behind this one, I believe

good fortune to all...

willey