Palm shares heavily shorted despite Pre optimism

The new Palm Pre cellular phone and Touchstone magnetic charger can be seen in New York June 3, 2009.

NEW YORK (Reuters) - While optimism about Palm Inc's PALM.O new smartphone has fueled a meteoric rise in the company's stock price, a large swatch of shareholders remains unconvinced.

The company has seen increased attention from short sellers betting that its share price will fall despite the hoopla surrounding the June launch of Palm's most important product in years -- the Pre phone.

As of June 30, Palm's short interest was some 42.2 million shares, or about 30 percent of its outstanding stock and 10 percent above short interest in the middle of last month.

This comes even though most analysts are optimistic about Palm. According to Reuters Estimates, 15 of 18 analysts covering the company advise their clients to buy or hold the stock, and see its return matching or outperforming broader indexes.

"It's a remarkably divided story," said Avian Securities analyst Matthew Thornton. "You've got long-term investors who are in the stock for bigger-picture reasons."

In comparison, short interest in Apple Inc (AAPL.O) is about 2 percent, and it is only about 4 percent for BlackBerry-maker Research in Motion Ltd (RIM.TO) (RIMM.O).

Palm shares have quintupled in price this year, thanks to excitement over the Pre, which was unveiled at the Consumer Electronics Show in January. The shares were trading at $14.33 on Wednesday on Nasdaq, after starting 2009 at about $3.

Palm's future is seen as bright by those who think the global market for multimedia phones will explode in coming years. Supporters say Palm can contend, even though it is much smaller than rivals like Nokia (NOK1V.HE), Apple and RIM.

In contrasting to Palm's share ascent is the constant indication that sellers loom. Palm's short interest has hovered near 30 percent for much of the past year, and reached 36 percent last November.

Palm has earned its share of negative sentiment in years past with product mishaps, such as the ill-fated "Foleo" portable computer, which was introduced with much fanfare only to be canceled months later. In addition, Palm has sometimes reported quarterly results that have fallen short of expectations.

"The Pre is a great product and it was a successful launch. But it's well known that in the past they disappointed in a number of quarters, and they were late delivering some products," said analyst Blaine Carroll of FTN Equity Capital Markets.

Questions remain about Palm's ability to ramp up supplies of the Pre and grow sales in a world where the iPhone and BlackBerry already have millions of loyal users who regularly upgrade when new models debut.

TRACK RECORD

Still, a fair amount of the optimism about Palm is fueled by the Pre and the WebOs, its new operating system, which will be built into new phones.

In January, the stock jumped, sparked almost solely by the Pre, which has enjoyed critical acclaim and solid sales since its launch in June.

"The rapid rise -- part of that has been short-covering and a short squeeze," said Thornton. "A lot of guys were forced out, and tried to get back in it at higher levels."

Short-covering occurs when market participants borrow a stock and sell it, betting on a profit when buying it back later at a lower price before returning it to the original holder. When a heavily shorted stock suddenly rallies, those with short positions can be forced to "cover," or buy the stock back, under unfavorable circumstances. This can feed on itself, causing a volatile move as more short-sellers cover their positions.

A potential acquisition of Palm, perhaps by a rival or by a hardware maker looking to get into the phone business has also buoyed its stock. Analysts have cited Dell Inc (DELL.O) and Microsoft Corp (MSFT.O) as possible acquirers of Palm.

But analyst Tim Long of BMO Capital Markets last week started the stock at "market perform," saying that Palm's future lies squarely in its ability to manage its core business -- developing and selling smartphones -- against proven names like RIM and its BlackBerry.

"Our concerns are based on the competitiveness of the market and the company's history of lackluster execution. There has also been a lot of speculation that Palm is an acquisition target of a number of companies, which we think is unlikely," he said.

(Reporting by Franklin Paul, editing by Tiffany Wu and Gerald E. McCormick)