J2 GLOBAL COMMUNICATIONS, the subject of a June 19, 2008, report by Short Alert, was down 14% a year later, but Guild sees far more downside. About 80% of the company's sales come from transmitting electronic faxes, a business that's in decline. Its growth in subscribers has come from acquiring other companies, he says. And 50% of its paid subscriber list turns over every year. Its stock is now hovering above 20 but could easily plunge below 10, asserts Guild, if it were hit with the one-two punch of no significant acquisitions and fewer paid subscribers. J2 President Scott Turicchi counters that "our short position has fallen to 1.7 million shares, less than 4% of outstanding shares of j2 Global and near an all-time low."

The fourth stock, Middleby, was the subject of a Jan. 18, 2008, report by Short Alert. A year later, it was off 58%, but it has since retraced two-thirds of its loss. Guild calls Middleby, which makes commercial-kitchen equipment, a "classic roll-up," with acquisitions hiding the slipping growth in the core business. The Short Alert analyst says "research shows that most acquisitions reduce shareholder value," an assertion seconded by finance professor Lev. Middleby has been buying some of its rivals. But the recession has led to a decline in new restaurants and, by extension, in orders for equipment. Middleby CFO Tim Fitzgerald readily concedes that there's "softness in the restaurant industry," but adds that the company is "strategically well-positioned when the market returns." But, Guild would argue, at a price much lower than the recent 44.68. The Barron's protocol would have required that profits be taken on MIDD early this year, at 23.81 a share.

COMPASS MINERALS, says Guild (pronounced "guyld") is a "one-off [success] that Wall Street treats as a continuing story." The company is North America's largest producer of de-icing salt, which accounts for 55% of its operating profit. The rest comes from potash, used in fertilizers. While the price of every other fertilizer component has collapsed by 70%, potash remains at bubble levels, Guild says, even through demand has collapsed and North American inventories are at record levels. Farmers don't need to apply potash every year for a healthy crop and, even if they did, buying much now would be a problem, since credit is tough to obtain. As for the salt business, long-term demand grows if new roads are built, and road-miles have been rising only 0.2% a year in the U.S. In the short run, demand is driven by winters, which were among the worst on record in the Midwest and parts of New England over the past two years. But unless the coming winter is especially severe, high prices and state and local budget woes could crimp demand. A Compass spokesperson notes that, of the six analysts that cover the stock, one rates it a Strong Buy, another as a Buy and three as Hold. Only one of the six agrees with Short Alert that it's a Sell. But Guild contends that, based on normal prices and sales volume for salt and potash, the stock is worth 12, far below its current level in the mid 50s.

K12 is viewed by Guild as a "limited-market" story. "When Wall Street gets excited by a new product," he remarks, "it overestimates the size of the market." K12's product is an online educational package for home-based students from kindergarten through high school. The company can also provide live teachers for students who really need help. Guild cites research showing that on-line learning has clear benefits for a very limited number of students, and he adds that state and local budget cuts threaten to reduce per-student support. K12 Chief Financial Officer John Baule notes that the company's market is now quite small and has lots of room to grow. The key question, however, is whether the stock deserves a price/earnings multiple of 50. If its earning growth slows and its P/E shrinks to, say, 25, the stock, recently in the low 20s, could fall sharply.

The fifth company, Pactiv, makes egg cartons, plastic cups, take-out containers and Hefty bags. The subject of a critical June 17 online feature by Barron's Daily Stock Alert ("Pension Problems Could Put a Hefty Hurt on this Stock"), Pactiv is what Guild terms a "misleading earnings story," stemming from certain accounting rules. Although Pactiv has massive, unfunded pension liabilities, all of its earnings for 2008 came from a nonexistent return on pension assets. Similar legerdemain, says Guild, is bloating earnings in 2009. Pactiv CEO Richard Wambold and CFO Ed Walters counter that their handling of pension income is quite proper and merely applies generally accepted accounting standards. Guild agrees, but maintains that GAAP sometimes distorts a company's financials. According to his calculations, Pactiv could be worth as little as $6.40 a share. It recently traded above 20.

In addition to recommending outright shorts, Short Alert also publishes a "Most Dangerous" list of stocks that rate further scrutiny. That list, available in greater detail on www.squareoneanalytics.com, now includes: Imax (IMAX): Short Alert argues that Imax's 3-D systems are at the end of their growth cycle and face new competition, and that the company is bleeding cash, with all of its debt due next year. Hanesbrands (HBI): This is an apparel maker whose brands are in decline and that gets 40% of its earnings from pension "profits." Lancaster Colony (LANC): It sells caviar and candles -- items that consumers can easily do without in a recession and that face growing competition. Scholastic (SCHL): Short Alert views this famed outfit as a fading monopoly on elementary-school book clubs. Pentair (PNR): This maker of pool pumps and equipment is overleveraged and faces a declining market. Sally Beauty Holdings (SBH): This outfit, which has grown by acquiring beauty salons, could run into trouble if recession-plagued consumers cut back on buying high-priced salon grooming products.

In addition to recommending outright shorts, Short Alert also publishes a "Most Dangerous" list of stocks that rate further scrutiny. That list, available in greater detail on www.squareoneanalytics.com, now includes: Imax (IMAX): Short Alert argues that Imax's 3-D systems are at the end of their growth cycle and face new competition, and that the company is bleeding cash, with all of its debt due next year. Hanesbrands (HBI): This is an apparel maker whose brands are in decline and that gets 40% of its earnings from pension "profits." Lancaster Colony (LANC): It sells caviar and candles -- items that consumers can easily do without in a recession and that face growing competition. Scholastic (SCHL): Short Alert views this famed outfit as a fading monopoly on elementary-school book clubs. Pentair (PNR): This maker of pool pumps and equipment is overleveraged and faces a declining market. Sally Beauty Holdings (SBH): This outfit, which has grown by acquiring beauty salons, could run into trouble if recession-plagued consumers cut back on buying high-priced salon grooming products.

In addition to recommending outright shorts, Short Alert also publishes a "Most Dangerous" list of stocks that rate further scrutiny. That list, available in greater detail on www.squareoneanalytics.com, now includes: Imax (IMAX): Short Alert argues that Imax's 3-D systems are at the end of their growth cycle and face new competition, and that the company is bleeding cash, with all of its debt due next year. Hanesbrands (HBI): This is an apparel maker whose brands are in decline and that gets 40% of its earnings from pension "profits." Lancaster Colony (LANC): It sells caviar and candles -- items that consumers can easily do without in a recession and that face growing competition. Scholastic (SCHL): Short Alert views this famed outfit as a fading monopoly on elementary-school book clubs. Pentair (PNR): This maker of pool pumps and equipment is overleveraged and faces a declining market. Sally Beauty Holdings (SBH): This outfit, which has grown by acquiring beauty salons, could run into trouble if recession-plagued consumers cut back on buying high-priced salon grooming products.