Showdown at the ON2 Corral

Whole Hog Investing: Recklessly and foolishly placing all (or almost all) of your investment account in a single equity position.

Very interesting to see the 11% increase in short interest on my Whole Hog play (ON2 Technologies) this last reporting period.

This lends credence to a hopelessly outside the loop Whole Hog investor’s conjecture that the main reason we did not get the reverse split by the deadline was because of the short interest pile on.

What are the shorts to do now? How do they plan to cover that heavy load without causing a squeeze? While I’m sure they thought that the ON2 share price rose far too fast when matched up against current revenues, I do think that they were also attracted by the chance to capitalize on the reverse split. Here’s how ONT shareholders have faired since the Hedge Hogs went Hog Heavy on the short end:

Mighty successful Hedge Hogs. They sure were successful at driving down the price. But volume has dried up significantly and I wonder what negative catalyst they see that will enable them to get the high volume days that they will need to cover. This is the boom time of the year traditionally for ON2, and this year is shaping up as no exception to that rule with the CES show just around the corner. There’s imminent China Mobile news hanging in the air, as well as a possible VP8 deployment. I just don’t see a big chance for any real negatives to hit the stock in the coming weeks. (Of course, I’m just a no nothing Hog outsider). What would happen when some real positive news hits with all these short shares left to cover? Are the shorts just going to sit on this one for months? If revenues increase again this quarter, the current valuation is really not that extravagant.

All of this is pure conjecture however. Dealing with conjecture/speculation, and reigning in flights of fancy is a key factor to successful Whole Hog investing. Its a fine line you walk between solid analysis of the evidence at hand, and fantasy speculation that ignores negatives and overemphasizes any positive. When you go Whole Hog its very easy to fall into that Pollyanna trap.

So let’s add another well worn premise: Regarding the decision not to reverse split, the other conjecture that could lull a foolish Whole Hogger into fantasy land is the possibility of a buyout. (A key element to most Whole Hog plays has to be that its priced at a tempting big boy buyout price) Who are possible bargain shoppers? Adobe of course, plus Cisco because of their recent video emphasis. Nokia, naaa. I’ve always wondered why Microsoft never seemed to show an interest in ON2’s proprietary technology. Once the news came out that their VC-1 codec was only 2% Microsoft proprietary technology, it became even more puzzling. What would have fit their proprietary plans better than the VP codecs? I think the age of Microsoft has really ebbed now. The intensity to dominate that Bill Gates displayed over the years really seems to have dimmed significantly. I’m just not sensing buyout right now however. I think it was the Hedge Hog short threat that stopped the Board from triggering the R/S.

I’ve got my borrowed funds at the ready. I may sit out this week. I think there could be another effort to drive down the price before the CES show. We really seem to have run out of sellers at this price however. This stock took a severe pounding in the second half of the year and it really did not phase the institutional investors at all. Institutional share ownership really hasn’t dimmed.

Looking forward to an even higher percentage of my wealth to be wrapped up in a single company - boom or bust.

-- Filed December 26, 2007 at 12:21 pm