Investors Shrug Off Some Option Probes

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While the words “backdated options probe” have proven to be poison for the stock of many companies caught up in investigations of backdating, half of the L.A.-area companies under investigation have seen double-digit growth in their stock price since being thrown into the m & #281;l & #233;e.


In all, six companies in Los Angeles and Ventura counties have been mentioned in options-backdating probes. Of them, Agoura Hills-based THQ Inc., Calabasas-based Cheesecake Factory Inc. and Santa Monica-based Activision Inc. have seen at least a 13 percent increase in share prices since their names were mentioned as a target of an investigation.


Stock watchers say that despite all the press and attention given to options-backdating probes, investors still value companies the way they always have: Stocks go up when a company’s prospects look good and go down when they don’t. Many companies have seen their stock prices drop after an announcement of a probe. But in many of those cases, options backdating was only one of the companies’ problems.


“A lot of investors shorted on the rumors and sold on the news of the investigations,” said Mike Hickey, an analyst with Denver-based Janco Partners Inc. “But those who held onto the strong companies are glad they did.”


Especially those holding THQ stock. The developer of interactive and gaming software has seen its shares soar more than 28 percent overall and 18 percent compared to the S & P; 600 Info Tech Index, since the Securities and Exchange Commission began looking into the company on Aug. 7.


“The gaming market is hot right now,” Hickey said. “Despite the threat of possible earnings restatements, both Activision and THQ have solid management teams in place, encouraging earnings and a bright outlook.”


Likewise, game developer Activision’s stock gained nearly 22 percent since the SEC said on July 28 it would look into the company’s granting of options.


“Activision has $1 billion in cash, low debt and a solid management team in place,” Hickey said. “Those stats outweigh an options probe for investors 10 times out of 10.”



Rebounding industry


The interactive software sector isn’t the only industry to see growth. Cheesecake Factory has seen its stock gain 13 percent since a probe announcement on July 19 more than 6 percent greater than the S & P; Midcap Index.


Chris O’Cull, of Nashville-based SunTrust Robinson Humphrey, sees Cheesecake Factory possibly benefiting from a rebounding industry.


“A rising tide lifts all boats,” he said. “The stock is down 25 percent year to date but the industry in general is making a comeback because consumers have more discretionary income thanks to dipping gas prices and there is still strong brand loyalty to the restaurant.”


The restaurant owner and operator last week released projections for third quarter earnings that estimated an 11 percent increase in revenue. It reported growth of more than 6 percent in sales at its new Grand Luxe Caf & #233; and added that it was on pace to open all 21 stores it had earlier predicted. However, same-store sales declined for the quarter and the voluntary options probe its conducting is going to cost the company more than $1 million.


The hike in California’s minimum wage is also going to sting the company, O’Cull said, due to the fact that 23 percent of its restaurants are in the state.


“The company is going to have a good year but it may be out of line with the rest of the industry,” O’Cull said. “But the options probe has little to nothing to do with any of that.”


Of course, not all the options-probe companies have been as fortunate. As of last month, more than 100 companies have been mentioned nationwide in the SEC’s investigation into the backdating of options. And according to Bloomberg News, more than two-thirds of those companies saw an immediate dip in their stock price costing those involved about $8 billion in total market value.


Such an effect was sustained by Computer Science Sciences Corp., Semtech Corp. and Vitesse Semiconductor Corp., each of which has seen drops in their share prices after options probes were revealed.


Computer Sciences, an El Segundo-based provider of IT services, announced on June 29th that the SEC came knocking and since then its share price has lost 17 percent and the company has been sued by several investors.


Chipmaker Semtech has also sung the stock-options-probe blues after the Camarillo-based company delayed its earnings in April, got an inquiry from the SEC along with a subpoena from a Manhattan U.S. attorney, both pertaining to options.


After the SEC inquired in June, Semtech’s stock has lost more than 12 percent and has recently stated that it was going to restate all earnings between 2002 and 2006.


None was hit harder than Camarillo-based chipmaker Vitesse, which has seen its shares drop more than 70 percent since the SEC announced in April it was looking into the company’s options practices.


But Vitesse has a diverse portfolio of problems. This year it fired three executives, including its chief executive and chief financial officer, due the “integrity of documents” pertaining to options. It has hired a turnaround firm and may restate more than three years’ worth of earnings.


The six companies could well be joined by others. KB Home said last week it may restate its earnings because the Los Angeles home builder said it improperly accounted for stock options awarded to Bruce Karatz, its chief executive.


Backdating of options refers to options grants, typically made to top executives. They buy stock at artificially low prices because the grant was backdated to the stock’s low price point and sell at today’s presumably much higher price, thereby increasing their take.

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