JCOM Punished Following Downgrade

JCOM was punished by the market today after being downgraded by Pacific Growth Equities at 1:00 pm, falling 16.6% to end the day at $33.57. (Prior to 1:00 pm the stock was up slightly.) The Reuters summary of the downgrade is as follows:

BANGALORE, March 29 (Reuters) - Pacific Growth Equities on Tuesday downgraded j2 Global Communications Inc. (JCOM.O: Quote, Profile, Research) to "equal weight" from "over weight," citing concerns that a tax on assigned telephone numbers might be introduced, hurting the company's profitability.

What is the commotion about? The government is currently looking for ways to generate more revenue for the Universal Service Fund, some of which could potentially affect JCOM's bottom line. (The Reuters article Universal Service Charges May Boost U.S. Phone Fees, published yesterday, provides the general story.)

Scott Jarus' (President) and Scott Turicchi's (CFO) take on these developments can be found here on the shareholder created JCOM website JCOMtalk.

An excerpt from this letter from top JCOM management (bold my own):

"We do not believe that such a tax will have a material financial impact on the future prospects of j2 Global. We will continue to monitor the progress of the USF funding alternatives and will lobby vigorously against any proposal that would impose a regressive tax on the consumers of our service and cause us to alter a portion of our business strategy. Again, please keep in mind, this is only one of only four proposals which may be considered by Congress, it has not yet been debated and it certainly has not been enacted."

My personal opinion of the situation:

I smell bs here on the part of PGE. Long-term holders of JCOM don't need to be reminded of the stock's history of manipulation, manipulation which occurred despite the company's outstanding performance and fundamentals. JCOM remains heavily shorted with a short interest of 4,161,805 as of mid-March 2005, comprising roughly 20% of the float.

My long-term outlook for JCOM remains the same. In my opinion this dip is an opportunity to double-down. We'll see where this company stands and how much money its short sellers have made in a few years.

Full disclosure: I am long JCOM.