24/7 Wall St.

The boom of investor interest in the field of 3D printing may be coming to a serious end, or at least entering a period where some value concerns have to at least be considered. We have focused on a short selling ETF called the Ranger Equity Bear ETF (NYSEMKT: HDGE) because it is one of the few “short-only” hedge funds out there that makes daily market bets against stocks that are either overvalued or against stocks in which many accounting issues have been identified. This team nailed a short sell opportunity in International Business Machines Corp. (NYSE: IBM), and now its focus has shifted to 3D Systems Corp. (NYSE: DDD).

24/7 Wall St. would point out that 3D Systems is currently worth more than $5.3 billion. This new research for a bet against 3D brings up many issues, and we have tried to represent both sides of the situation here because this has the potential to be one of those controversial reports.

This is a new short sale position in the short-selling ETF for the maker of 3D printers, print materials, on-demand custom parts services and 3D authoring solutions. The accounting has been identified as problematic because the company’s huge revenue beat was accompanied by a sharp increase in accounts receivable, with its days sales outstanding (DSOs) rising from 70 to 84 in the latest quarter on a year-over-year basis, with rising DSOs during the last year.

Valuation is a concern of the fund’s managers. Their new report showed that the company trades at 10 time trailing revenues, 112 times earnings and 110 times operating cash flow. That puts that valuation among the most overvalued stocks in the group’s valuation composite.

Another key issue addressed was that earnings were driven entirely by accruals. The company’s cash conversion cycle also was shown to have increased 24 days in the June quarter to 107 days. One more standout issue was that operating cash flow was $2 million in the latest quarter, down 63% year-over-year.

To make matters worse, the grading for 3D Systems is actually the worst of the 1,002 companies currently in the group’s stock database of short-sell evaluations. Here is a brief synopsis of its scoring on 3D Systems accounting:

• Revenue Multifactor: F
• Cash Flow Multifactor: F
• Earnings Quality Multifactor: F
• Expectations Multifactor: F
• Valuation Multifactor: F
• Shareholder Yield Multifactor: F

Here is the good news: 3D Systems is actually up $0.10 at $52.41, after having been down earlier in the trading day. Another point we would make is that the consensus analyst price target from Thomson Reuters is up at $55.00 per share. The bad news is that it could have some serious pain if any downward momentum can get going. To show just how much it has risen, its 52-week range is $21.57 to $54.78, and its stock already had one 3-for-2 stock split in February of this year.

We asked John Delvecchio and Brad Lamensdorf of the Ranger Equity Bear ETF (NYSEMKT: HDGE) how this position weights against International Business Machines Corp. (NYSE: IBM). Apparently, this is a new position for the fund and it is still rather small in comparison to IBM because of the newness of the report and also because 3D Systems is much harder to short.

One thing we always refer to is the Nasdaq short interest pages for any short selling position from outside managers and traders. This is becoming a significant short sell as we have seen when we evaluate the 3D printing short interest. As of August 15, the short interest here was just over 28 million shares and almost 9.2 days to cover. Note that this is the highest nominal short interest we have seen in the company’s stock, and it is almost a high on the days to cover.

3D Systems is a new short idea from the Ranger Equity Bear ETF (NYSEMKT: HDGE), based on new erosion of metrics, even if other short sellers have made this short position more than significant already. Google shows its share count as 101.6 million shares, implying that about 28% of its shares are out on borrow for short sales.

Another issue to watch is the news flow from 3D Systems and from other 3D printing companies in the next week or so. An upcoming conference called Inside 3D Printing Conference and Expo is soon to launch at the Hilton Double Tree out in San Jose, Calif., from September 17 to 18.

This ETF’s accounting score looks absolutely atrocious. One last caveat we have to make on an independent basis for anyone wanting to short sell this position now could have to fight some serious short-covering trading momentum if news or other developments want to make those short sellers buy shares to cover their short sale positions.