What do investors say when a company overpromises and then sells stock or converts into the rally? If it's his own holdings, they complain loudly. If it's company stock or a convertible bond, some will grant that he was just making the case to get the best price for his shareholders while others may feel betrayed. But what about the opposite case? What happens when executives talk the company down, and then buy the stock or converts at a substantial discount - both personally and in a corporate stock buyback? Are the ethics different when we look at a mirror image?
Since May, Cogent has been telling everyone who will listen that traffic growth on their network has slowed to a crawl, that the company faces pricing competition and has responded by declaring a price war, that the economy is hurting its sales - but of course that the company is strong enough to pull through eventually. It's hard to argue with such frank disclosure, we are used to spin in such cases. But companies usually spin such disclosures in an attempt to soften the blow, certainly Cogent knows the effect their words have on investors. The stock has dropped into the $7 range last week, off over 75% from its peak a bit over $30 last year - obviously given market conditions it would have dropped a lot anyway - but this far? Meanwhile, the company has been using the opportunity to buy back stock and converts at a discount, and CEO Schaeffer has personally bought $3M in converts as well. The worse the company looked in the short term, the better the price for those purchases, yes?
So what should we think? Are Cogent and Schaeffer playing with the traders minds? Taking advantage of the myopic Wall Street view of the telecom sector to make both themselves and longer term shareholders money? Is it even wrong to do so? Or are they just telling it like it is and then making the best of it? I mean, it's hard to argue against frank disclosure or *purchases* of stock and converts. Obviously the market is responsible for much of the movement of the stock and the pricing of the debt, but one can't help but wonder if Cogent isn't hitching a ride with the bears on purpose - just as they rode the bulls when they managed to sell that amazing 1% convert in the first place.
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