What’s Going On at Bio-Reference Labs?

I have to confess that I have very incomplete knowledge of this story, but there’s something very unusual going on with Bio-Reference Labs ($BRLI). On the surface, it seems like a very well-run lab testing outfit. Earnings have grown impressively for several years.

Last month, however, some short-selling websites came out publicly against BRLI with claims of phony billing practices. The stock dropped from around $26.14 to $24.20 on very heavy volume. The allegations stem from a former employee who claims she was fired after she exposed the wrongful practices. For their part, BRLI strongly deny the allegations and claim she’s a disgruntled former employee.

The shares have rallied back and BRLI is now above $28 per share. But by most conventional measures, the stock ought to be higher. Clearly, the allegations are hanging over the stock and it has an unusually large short position against it. Of course, this can backfire and create a “short squeeze” as those who bet against BRLI are forced to cover which sends the price even higher.

This isn’t the first time BRLI has been hurt by Internet bears. In September 2011, one website said the company often promoted specialty tests that were not cost effective. The next earnings report comes out on June 5th.

I think these situations are fascinating because you really can’t split the difference. One side is telling the truth and another side is not. How exactly does “tail risk” impact the stock? It’s hard to say but let’s say the market believes there’s a 20% chance the allegations are true and the result is a $15 drop in shares price. That would mean if the company is right, the stock gains $3, and if they’re wrong, it drops $15. (Bear in mind, I’m making these numbers up.)

The point is the market has to find a middle ground when there isn’t one. As a result, you get an odd share price. I should add that this is another reason why investors should like dividend-paying stocks. Companies can fudge all sorts of numbers, but if they’re going to send you a dividend check, you can be sure it’s real.

Posted by Eddy Elfenbein on May 15th, 2013 at 10:35 am

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