Amiable stock market guru Jim Cramer seems to change his mind faster than I can keep up with the news flow. Just the other day I was about to quote him in an article about embattled Linn Energy LLC (NASDAQ:LINE) only to find out that he’d already changed his mind on the matter. While I understand his logic, that doesn’t mean I agree with it.
The quick one-eighty on the company came after Linn Energy LLC (NASDAQ:LINE)’s voluntary disclosure that the SEC is investigating its accounting procedures. Those procedures have been in the spotlight all year after being called aggressive and overstated by short sellers. What surprises me is that Cramer is throwing in the towel now when it’s really only logical that the SEC should look into the situation given how aggressive these short sellers have been in attacking the company.
In changing his mind Cramer said that, “I had liked the company, but they’re under the microscope for accounting irregularities … And whenever a company is scrutinized for issues such as these, I sell. Even though the stock is cheap and I otherwise still like it, I practice discipline and sell.” While I can understand having a discipline like that, you are talking about a company that is being aggressively attacked by short sellers in a way that just seems a bit over-the-top.
Not only that but this isn’t a company that’s going to zero because the SEC discovers it’s a mirage. The company has real assets to back its business. Linn Energy LLC (NASDAQ:LINE) has ammassed more than three trillion cubic feet equivalent of proved developed reserves, another two billion cubic feet equivalent of proved undeveloped reserves as well as its hedge book, a gas plant and other facilities. That’s $10 billion in real tangible value and it doesn’t count the 14 trillion cubic feet of unproved drilling inventory which are estimated to be worth between $6.5 billion and $11.2 billion. That equates to a net asset value that’s conservatively worth $37.34 per unit and potentially worth up to $65 per unit.
I’m not saying that SEC investigations are something to ignore, however, high-profile short sellers have a way of dropping a stock down by bringing in the SEC. Take the case of Green Mountain Coffee Roasters Inc. (NASDAQ:GMCR). Famed short seller David Einhorn put together a 110 slide Power Point on the company’s accounting issues. That would seem to be what prompted an investigation by the SEC, which caused its stock to really take a dive. Despite the attacks and that additional scrutiny, over the past two years the company has continued to sell coffee. All the while its stock has steadily recovered.