CMGI Didn't Get The Down Market Memo

CMGI Inc. (CMGI-NASDAQ) is one issue that is actually just amazing.  You would have never known that this stock reported bad news of the loss of its Hewlett Packard (HPQ) business along with its earnings.  The company reported another positive earnings quarter but it warned that it was losing $100 million in annual business since they were notified that HP was insourcing.  CMGI closed at $1.55 on Monday ahead of earnings, it gapped up a tad after the positive earnings, and then went lower on the news of the loss of the H-P business.

This one hit as low as $1.38 the day after the earnings with a tanking DJIA & NASDAQ.  In after-hours on Monday I noted that it wouldn’t be surprising if the shares gave back more of their recent gains.  But instead of going down and staying down, the first day we had a rally it screamed up.  Its old counterpart, Internet Capital Group (ICGE-NASDAQ), did not fare the same and closed down much lower this week.  So what gives?

The bulls are winning here.  CMGI trades usually about 5.9 million shares, but here is the volume for this week: 9.7 million shares ahead of earnings, 15.2 million shares after the earnings, then 22.98 million shares, then 31.6 million shares, and finally 16.4 million shares.  Its February short interest was 17.3 million shares in February, up from 15.1 million shares.  That isn’t ridiculously high in short selling of a cult stock. 

I received an email asking me if I thought this could be a takeover target and I responded with as close to what would be an "absolutely not" as you could get without putting in some caveats.  I also re-read over and over everything I could about the wording of the contract loss and the forward projections.

This is all about a) what was said at the Baird conference this week (like many cared with the market tank), and b) the cult stock status.  The comments at the conference were for up to $1.10 billion in 2007 revenue and even full year gross margin improvement. CMGI is targeting 12% to 14% gross margin, 7% SG&A, and 5-7% operating margin.  CMGI was also optimistic in its ModusLink supply chain operations business. 

Even in a market like this, the bulls can find issues to get behind.  When even the "front-line defensive stocks" get punished with the market, it sure makes you wonder when you see performance like this.  I had hardly noticed this one because of the major market issues, but it really looks like congratulations are in order to the company and its current believers.  Shares closed the week out at $1.66 and traded as high as $1.71 (a recent high). 

If you have any thoughts or comments feel free to send them in.  We are always looking for fresh views and thoughts.  We’ll assume that if you are positive on the name that you are long the stock and if you are negative that you are either short or have been burned in the past by this cult stock.  I have written in the recent past about how the company has been trying to transform itself.  We’ll see what next week brings.

Jon C. Ogg
March 2, 2007

Jon Ogg can be reached at [email protected]; he does not own securities in the companies he covers.