Speculative Buy - Websense (WBSN)

Well, first we are sorry this will prove useless to you, due to the time of publishing. We were researching off-site today and did not return in time to publish our idea for the day. We took a short term long position in WBSN, and partially hedged it, applying a strangle option strategy with the view that the earnings report would bring volatility. Our strangle is biased long, as we anticipate WBSN will execute well, either meeting or exceeding estimates, but if we are wrong, we expect our hedge could return our invested capital.

We took our short position yesterday, as we anticipated WBSN's run since its last report, along with the FOMC meeting and lack of analyst support for the shares, would send them lower heading into the report. We invested 1/3 of our long position in Nov 20 Puts at a price of $0.15. These are very illiquid securities, and that could hurt our ability to protect ourselves. The price increased 30% today, to $0.20, but we would likely not have been able to sell at that price. Today we took a long position in WBSN, buying Nov 25 Calls at $0.50, down from $0.65 or the closing price of yesterday. The Nov 25s touched a low of $0.40 today.

WBSN is due to report earnings within minutes and the conference call is at 4:30. The company has been going through an operational turnaround, and has lost the support of analysts, who point toward competition threatening the company. However, we note that the shares trade at 21X '07 consensus estimate of $1.10, while growth this year is seen at 23%. Growth is forecast to decrease significantly next year, but the company has managed to beat estimates quarter after quarter. We think this is a case where analysts are underestimating a market leader's ability to transition and to compete. We were right last quarter, but the shares are a bit more expensive this time around, so we hedged ourselves a bit. (See our disclosure at the Wall Street Greek website.)