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Summary:

Investors may be betting against “content farms” fortunes, if trends seen in Demand Media (NYSE: DMD) are anything to go by.

Richard Rosenblatt
photo: Jefferson Graham

Investors may be betting against “content farms” fortunes, if trends seen in Demand Media (NYSE: DMD) are anything to go by.

After its January float, DMD stock out on loan for short-selling peaked at 3.5 percent of its total and has stayed there since mid-February, DataExplorers, an analyst organisation which tracks short selling, told paidContent:UK last week.

“While that may not sound much, it represents 77 percent of the supply of stock that is available to be borrowed,” DataExplorers’ Will Duff Gordon tells us. “It would therefore be hard to short more of the stock.”

In shorting, hedge funds buy stock, out on loan from long funds like pensions, at one price and sell it, hoping the price will fall so they can profit from the difference. That is basically betting against a company’s share price.

So there has basically been a lot of confidence that Demand Media’s stock price will slide following its floatation. “(Short sellers) are active in this stock,” says Gordon, who says the kind of short activity being seen in Demand is high.

The high level of short interest in Demand began even before Google (NSDQ: GOOG) announced it would change its algorithm to focus on “quality” content. Were hedge funds expecting such an announcement? Were they betting Demand was set to be disadvantaged?

Elsewhere, Stifel Nicolaus bank has opened its Demand coverage with a “buy” rating, while Goldman Sachs and Jefferies rate it “hold”, SAI reports.

  1. There are fundamentally good reasons to be short DMD, notwithstanding that it appears to be a popular trade. Irrespective of the google algorithm changes and long term impact, do not forget about the large % of registrar revenue that is being marked up with a inappropriate multiple – the market will realize this one day.

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  2. LinkedIn Corp. is down some more than 30% from since its initial public offering (IPO) and Pandora Media Inc., which had a strong debut just last week, has dropped 35%. Indeed, billion-dollar cash advance valuations for companies like Pandora and online coupon site Groupon Inc. have lured tech-hungry investors into buying what they think is the
    next big Internet stock. But the reality is that these companies are driving demand through low-float IPOs and undeliverable growth promises. Investors need to understand that despite the excitement surrounding Internet and social media companies, the chance that these businesses will deliver on profitability promises is slim to none. The fact that these companies were able to garner as much investor interest as they did raises a red flag that suggests a new tech bubble has formed – and is ready to burst.

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