Warm Regards,

JL

JL: Greetings. Last time we talked you were pretty excited about a new shorting opportunity. How about we dive right into that?

CASH: Straight to the good stuff, eh? You don't want the finer details of last week's adventures?

JL: Nah, maybe some other time. Let's get to the pick.

CASH: Rough crowd! If I didn't have such thick skin, I might get my feelings hurt.

JL: Oh come on, you know I'm just giving you a hard time. (And besides, you kind of walked into that one.) Really, though, you just built up the sizzle so much at the end of our last chat, it feels right to serve up the steak.

CASH: Fair enough. My latest short pick -- the one I got so excited about last week -- is Rubicon Technology Inc. (RBCN:NASDAQ), a new stock as of November 2007. Now typically, I like to see highfliers get 12 to 18 months of good trading before I short them... but this name is breaking down more quickly than I expected.

JL: Do you think the fast breakdown is a function of the overall market? A result of U.S. equities seeing rising pressure and volatility?

CASH: The volatility has a lot to do with it. As we mentioned, during choppy unstable periods, investors begin to lose their appetite for risk. When that happens, growth stock multiples often contract faster than the multiples on more established blue chips. But there's more to the story with RBCN. There's a piece of the puzzle that not everyone is aware of.

JL: Of course -- that hidden Cash McDash edge again. Information just seems to migrate toward your desk.

CASH: What can I say? Uncovering the hard-to-know info is a big part of what I do. I've got people... my people have people... and so on. But before I reveal the hidden factor, I should probably tell you a little bit about how RBCN caught my eye.

JL: Sure, lay out the story for us.

CASH: It actually got my attention when the stock priced in mid-November, during a pretty rough period for the overall market.

JL: We seem to be having many rough periods these days.

CASH: True. But anyway, the stock priced at $14 and immediately traded at a premium. By the end of March, it had nearly hit $35 -- well over a double -- so you could tell there was plenty of enthusiasm. But then an interesting twist developed. The stock began trading sharply lower at the end of March and into the beginning of April.

JL: Hmm. Why does that sound odd? March, April... end of March... that's right around when the market made a strong run to the upside, wasn't it? On hopes that Bear Stearns marked the last of the big meltdowns? In fact, I'm pretty sure the post-Bear-relief rally is what set up your record-breaking performance in April.

CASH: Exactly. Your memory serves you well. So that leads to a natural "whodunit" type question. Why does a growth stock in a strong sector, with market-leading technology and accelerating sales, start looking down in the mouth just when the rest of the market is starting to party?

JL: No idea. You tell me, maestro.

CASH: The stock started dropping because people were selling it.

JL: And in other breaking news, grass is green and the sky is blue. Thanks for the insight, Captain Obvious!

CASH: Okay, okay. I guess I phrased that a little too simply. RBCN started dropping because a select group of people -- very important people to the company -- were selling it. See, most of the time, when insiders sell a portion of their ownership via an IPO, there is something called a "lockup period," where they agree to not sell anymore shares for a certain length of time while the stock establishes itself.

JL: Sure. As I understand it, the lockup period allows the market to absorb the new liquidity and establish a trading range before additional shares hit the market. It keeps the playing field a bit more level, by preventing insiders from dumping shares on the public at the drop of a hat. It also gives the public a chance to become more familiar with the company -- how it reports earnings, how growth is progressing, how management interacts with investors and so on.

CASH: Exactly. That stuff is the good side of the lockup period. But there is also a bad side. The lockup period can also bring more volatility to a stock, as investors sometimes panic just before the period expires. They know there's a good chance additional stock will be sold once the insider restrictions are lifted, and they don't want to be holding their shares if too much supply begins to pressure the price.

JL: This sounds like a self-fulfilling prophecy type deal, where perception affects reality in even greater amounts than usual. Are we talking about pure anticipation selling regardless of what key shareholders do?

CASH: In Rubicon Technology's case, it wasn't just paranoia. The key shareholders actually did start to sell their shares in surprising amounts, although at a much lower price than the peak. You know these insiders had to be frustrated, watching their shares fall from $35 to below $25 in the two weeks leading up to their official chance to get out.

JL: Gotcha. So now what happens? Is most of the decline already booked for RBCN?

CASH: Oh no, I definitely think there's still a chance to make money here. See, at least one key shareholder still holds a large position that is slowly declining. There is going to be further strong temptation to get out before the stock falls all the way back to the IPO price of $14 a share. And even if this guy has nerves of steel and continues to hold his stock, the perception in the market now is that he is an opportunistic seller, so there will be few willing to step in and buy.

JL: There's that perception thing again.

CASH: Combine a large selling shareholder with a high multiple and a decreasing public appetite for risk, and you have a world-class recipe for a declining stock. That's not to mention the potential pitfalls the company could get into with its underlying business. Since growth expectations are so high, it will be difficult for RBCN to offer any kind of positive surprise. Its technology is superior, but innovation always chases profits. Rubicon may be head and shoulders above its competition, but that competition is continuing to make strides.

JL: What is Rubicon's technology focus again?

CASH: Its main product is a type of wafer used in the manufacturing of light-emitting diodes (LEDs). The products are used in everything from cellphones to wide-screen TVs to even residential and commercial lighting.

JL: This is the type of lighting that's supposed to take over from our old inefficient bulbs, right? Better use of electricity, less heat and all that?

CASH: Yes. That's part of the hype built into the share price. But if LEDs don't replace traditional incandescent lighting as quickly as some project, it would deflate a good bit of the optimism that buoyed Rubicon's stock. Suffice it to say there are plenty of positive news events that could happen to the company... but since the stock seems to already be expecting these events, the only thing noteworthy would be disappointing news.

JL: I see. So what's the trigger point on this trade for you?

CASH: I'm watching the $20 per share level very closely. This has been a key pivot area for the stock since the week after it came public. If it closes below this mark, I would suggest shorting for an initial run down to the $14 IPO level. It's likely it will find support there at least temporarily, but if earnings fail to accumulate, this stock could make a run for rock bottom.

JL: We'll add this one to the watch list. Speaking of which, I know some of your recent recommendations have done quite well. We should do a follow-up on one or two of those, and go over the play-by-play of what's happened so far.

CASH: No doubt. Sounds like a plan for next week.