Playing Chicken With CGI Group

 | Dec 05, 2013 | 10:00 AM EST  | Comments
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Stock quotes in this article:

hsy

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nke

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hpq

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orcl

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wm

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sap

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gib

It's pretty clear the healthcare.gov website is a total debacle. It shouldn't have been a big surprise. Mega-tech projects almost always turn out like this. And it's just not government projects. I can count half a dozen huge enterprise software implementations that wrecked a lot of quarterly earnings announcements.

In 1999, Hersey Foods' (HSY) enterprise system failed during Halloween and cost the company over $100 million in lost candy sales. In 2000, Nike (NKE) spent $400 million on a newfangled computer system. Inventory was so screwed up, the stock dropped 20% and the company faced a mountain of class action lawsuits.

Computer geeks aren't immune either. In 2004, Hewlett-Packard's (HPQ) enterprise system crashed so badly it was like a perfect storm of failure. The system ultimately cost the company five times the original budget. The stock fell 18% when the company missed the quarter. In 2010, Oracle's (ORCL) bug-plagued enterprise system forced co-President Chuck Phillips to resign.

Waste Management (WM) trashed its entire SAP (SAP) installation after 18-months and $100 million down the drain. Their business wasn't picking up during that one.

The Romney campaign also  had a big fail whale. The beached "Orca" system was blamed for the campaign's inability to get out the vote.

As the company that built the ill-fated healthcare.gov site, CGI Group (GIB) has taken a lot of heat. Despite the bad publicity, the stock is up 48% year-to-date.

Short sellers have been very active in the stock all year. Days-to-cover has ranged from 18 days to 39. It's not exactly an undiscovered short idea.

The short argument mostly revolves around the thesis that company will be unlikely to get another government contract to build an IT project. Shorts also worry about a slowing backlog and declining cash flow. There is also concern over the possibility the company might have to give money back to the government for the failure of the healthcare.gov website.

Shorts also have questions about how GIB has accounted for its $2.7 billion purchase of European company Logica. While these are all valid concerns, I think they will take awhile to appear. Tech investors rarely care about quality of earnings, cash flow and accounting.

The board of directors announced last month a $100 million stock buyback. The buyback will only add to the aggravation of trying to short the shares.

CGI Group, Inc. I would stay away from shorting this stock. The short interest is too high and it's unlikely you'll be able to borrow enough stock to short it.

In the past, we've seen a bunch of wise guy hedge fund managers who purposely go long a heavily-shorted stock and then hit the airwaves. I can see Carl Icahn on CNBC next week bragging how he bought millions of shares on the anticipation the website would be fully operational by the December 23 deadline.

When you think about it, this would be an ideal long set-up. The company reports at the end of January. You'd get a double whammy -- a positive healthcare.gov announcement and blowout earnings. (Heavily shorted companies always find a way to produce blowout numbers.) Last quarter, the company beat the consensus estimate by $0.07 and the stock took off. I can see the "we put this issue behind us" press release now.

While I'm too chicken to play this stock, if I did, I would play on the long side for the next two months. You could potentially make enough money to afford health insurance!

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