FalconStor Software (Nasdaq: FALC) - The Biggest Loser

The Biggest Loser is a new column we are launching to discuss the most significant market capital loser of the day. On this inaugural edition, The Biggest Loser is FalconStor Software (Nasdaq: FALC).

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FalconStor Software (Nasdaq: FALC) - The Biggest Loser

The day's biggest loser was FalconStor Software (Nasdaq: FALC), which dropped 22.4% Wednesday, after the abrupt resignation of Chairman, CEO & President ReiJane Huai. The reason behind the CEO's resignation was the key driver behind the collapse of the stock. But, what should shareholders and prospective shareholders do now? With an investigation still underway, that's not an easy question to answer.

FalconStor's official statement read:

"Mr. Huai tendered his resignation following his disclosure that certain improper payments were allegedly made in connection with the Company's contract with one customer. The Company has fully cooperated with law enforcement authorities with respect to the ongoing investigation, and it will continue to do so. In addition, a special committee of the Board has been formed to conduct a full internal investigation of these matters and the special committee has retained counsel to assist it in its investigation."

The company also announced these changes to its management team:

Eli Oxenhorn (board member) to non-executive Chairman of the Board
James McNiel (Chief Strategy Officer) to Interim CEO and President
James Weber (Chief Financial Officer) to CFO & Interim COO

The question for shareholders who withstood the storm today and for prospective shareholders is buy, sell or hold?

The answer to that question lies in several factors. First and foremost, there is an investigation underway that threatens to turn up more dirt. As an analyst, I learned to give respect to the possibility of another shoe dropping, and given the universe of stocks to choose from, why would a new shareholder risk touching FalconStor now? And I do not like the shift in management, unless we later learn it was a one man mistake. Too many of the old team remain in place to investigate the alleged crime for my comfort, but the news is still breaking.

The reason why someone might risk it is that the alleged criminal activity might be relegated to a certain individual or handful of individuals and might not threaten ongoing operations. If that were the case, then perhaps the stock might quickly regain the ground it lost today. But even if this is the case, now is probably not the time to buy in. The dirt is still turning up and shareholders remain more likely to sell than to buy. That is unless the story of the company or its product is much bigger than this scandal. That is only something that further detailed analysis can discover. And the question of the value of the company's assets comes into focus as well, and whether that might set a floor or whether an acquisition multiple might.

I can only comment lightly, since this is my first exposure to the company. What I note off the bat is that the earnings outlook is one that has deteriorated over the last quarter. Also, the growth outlook is a slower one than what the company has accomplished in recent years.

The stock's biggest shareholder is the guy who just retired from its operation. It also has a few interesting fund holders at Vanguard and Gabelli. The two analysts who cover the company appear to have not had a change in opinion in over a year or more (based on Yahoo Finance data). It is possible they have some tie to its capital raising efforts, or are following to serve the institutional ownership that exists already. Whatever the case, the analytical coverage is not impressive to me.

The stock has been in the dumps since the middle of 2008. The chart is not telling me anything good, except for the fact that the shares stabilized today after diving to as low as $2.63. FALC closed at $3.15 after trading flat from 1:30 PM or so.

My Call:

I would probably hold the shares if I owned them already, and not touch them if I were new to the story.

The Rest of the Day's Loser List Included:

Apricus Biosciences (Nasdaq: APRI): -18.8%
Green Mountain Coffee Roasters (Nasdaq: GMCR): -16.1%
Ohio Legacy (Nasdaq: OLCB): -16%
Broadway Financial (Nasdaq: BYFC): -14.3%
ModusLink Global Solutions (Nasdaq: MLNK): -13.7%
Pro-Dex (Nasdaq: PDEX): -12.5%
Sealy Corp. (NYSE: ZZ): -11.5%
RF Industries (Nasdaq: RFIL): -11%
China Precision Steel (Nasdaq: CPSL): -10.2%
Tongxin International (OTC: TXICW.OB): -10.2%
Satyam Computer (NYSE: SAY): -10.1%
HF Financial (Nasdaq: HFFC): -10.1%
Carver Bancorp (Nasdaq: CARV): -9.9%
Old Second Bancorp (Nasdaq: OSBC): -9.7%
Marshall Edwards (Nasdaq: MSHL): -9.7%
Constar International (Nasdaq: CNST): -9.5%
Income Opportunity Realty Trust (AMEX: IOT): -9.5%
Vision-Sciences (Nasdaq: VSCI): -9.4%
American Greetings (NYSE: AM): -9.2%
EntreMed (Nasdaq: ENMD): -8.9%
First Security Group (Nasdaq: FSGI): -8.8%
Community Shores Bank (Nasdaq: CSHB): -8.7%

In other corporate news, EPS were reported by Actuant (NYSE: ATU), American Greetings (NYSE: AM), China Precision Steel (Nasdaq: CPSL), CKE Restaurants (CKE.F), Family Dollar (NYSE: FDO), OMNOVA Solutions (NYSE: OMN), SYNNEX (NYSE: SNX), Worthington Industries (NYSE: WOR) and Xyratex (Nasdaq: XRTX).

FedEx (NYSE: FDX) met with analysts. The JMP Securities LLC Financial Services and Real Estate Conference offered presentations by Amerisafe (Nasdaq: AMSF), D.R. Horton (NYSE: DHI), MFA Financial (NYSE: MFA) and Validus Holdings (NYSE: VR). The Wells Fargo Securities Consumer Conference (NYSE: WFC) brings presentations by Asbury Automotive (NYSE: ABG), Denny's (Nasdaq: DENN), Jack in the Box (Nasdaq: JACK), and Morton's Restaurant Group (NYSE: MRT). The Bank of America Merrill Lynch Banking & Insurance Conference brought news from BNP Paribus (Paris: BNP.PA) and Credit Suisse (NYSE: CS). The Bank of America Merrill Lynch Power & Gas Leaders Conference offered presentations by Exelon (NYSE: EXC) and Progress Energy (NYSE: PGN). Ford Motor Company (NYSE: F) appeared at the Paris Auto Show UBS Investor Conference (NYSE: UBS). The Oppenheimer & Co. Industrials Conference offered news from Kraton Performance Polymers (NYSE: KRA) and United Rentals (NYSE: URI).



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