The early bird ….

The early bird ….

There’s an old saying that the early bird gets the worm. When it comes to the wacky world of diabetes the early birds just might be anyone who owns shares in Insulet (NASDAQ: PODD). In early trading today shares of Insulet are down almost 4% and have fallen 11% over the last five trading sessions. This is hardly surprising given the many serious allegations made against the company combined managements silence.

Yet we suspect this recent slide is just the beginning and as we’ve been noting things could get much worse. Listen we have traveled down this path many times over the past 20 years. A path that goes something like this – first comes the allegations, followed normally by management vehement denials of the allegations, next comes the fork in the road. Either the allegations are proven to be false and shares resume their normal trading pattern or the other shoe drops and the allegations are proven to be true. Under the later and not the former, the bottom falls out from underneath the share price and it’s look out below.

This is what makes managements continued silence so dumbfounding. Now an argument can be made that management believes if they remain silent the news cycle will take over. That another story will come along and take the attention away from their troubles. This is after all the wacky world of diabetes.

However, this is a very risky strategy should more bad news come their way. Again, we have no idea whether the allegations made against Insulet are true. Our gut tells us were there is smoke there is fire. How big of a fire we’re not sure.

This is why we see it as critical that management get ahead of the story, to change the narrative. As we’ve seen over the last few days this could turn into a slow and steady decline in value. We suspect the smart money isn’t waiting around for the other shoe to drop and is trimming their positions in the company. The smart money likely believes they can always jump back in after the shares have been pummeled. That should these allegations prove to be false they can make a nice profit by buying low and selling high. They also will look even smarter should the allegations prove to be true. Simply put the risk of owning shares today outweighs the risk of selling shares.

Just looking at trading volume we suspect that the real carnage has yet to arrive. Should and again we’ll stress should these allegations prove to be true it will be watch out below.

Based on our experience we see the situation playing out something like this…. Now that the allegations have been made, now that two reports have been made public there will be a lull in news flow. A lull that will be broken by one of two possibilities, more bad news which will send shares even lower. Or continued silence not from the company but by the shorts. As we have noted previously there are two types of short sellers, those who have really done their homework and looking for a home run and those looking to make a quick buck.

If the shorts attacking Insulet are the later and not the former this recent slide in shares could be over quickly. If they are the former watch out below.

Only time will tell what’s really going on here but right now the only voices being head are coming from the shorts. Voices which will only get louder the longer the company remains silent. The longer Insulet remains radio silent the more we suspect there is more to this story. The fact they will not defend themselves creates the impression that these allegations have merit.

Perhaps the best way to think about this is look at Watergate. A story which began with what looked like a simple burglary. Yet a story that never went away and eventually lead to the resignation of the President of the United States. Anyone who lived through this dark period in our history remembers the slow and steady stream of reports. Reports that kept getting worse until eventually the damn broke.

We hope history isn’t repeating itself but as Norman Cousins said long ago; “History is a vast early warning system.”