By Michael Han, Guest Contributor

A 41% rip in the stock price of 500.com Limited ADS (NYSE:WBAI) in two days, since announcing what can only be described as a lousy quarter that missed consensus and even worse guidance (zero revenue as long as Internet sales ban is in place), is a “head scratcher”.  Lets look at some of the rumors that I am hearing since the fundamentals of 500.com stock clearly don’t seem to matter.

  1. The company’s Chairman was rumored to be have been released from jail (positive), only after giving up few names of several corrupt senior officials that worked with them.
  2. It is rumored that several “big money” friends of the Chairman in China could be pumping up the stock to possible give “important backers” an opportunity to cash out of 500.com stock.
  3. It’s rumored that they are looking to acquire a U.S. based gaming business.

Turning in corrupt officials to save your own skin could have very severe negative repercussions for the Chairman and the company going forward.  If I were a regulator in charge of granting Internet Sales licenses, I wouldn’t even dream about giving one to these guys.

U.S. Acquisition Rumors Seem to be Bogus

The U.S. acquisition rumors seem to be bogus. What could they buy for ~US $100 million? That would leave them with no cash, and there is no indication that Internet sales will resume. Even then, WBAI would still have to apply for a distribution license.

No matter how you look at it, this story doesn’t sit right to me. No one in Asia that knows the space would go near these guys, so who’s buying? Gullible U.S. day traders?

Using options to short 500.com stock is not a good idea because no one knows how long they can keep up this charade. If you have patient capital, shorting the stock makes better sense.

20% (7.1mil shs) of the total shares outstanding were on the short side of the trade few days ago according to Fidelity’s website, which gets a direct feed from the stock exchange every two weeks.  By now, I would think most of them have covered and, looking at today’s price action, my sense is that short squeeze is running out of fuel.

Equity Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.


 

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