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Wednesday, September 27, 2006

The Shorts Head Back To Level 3 (LVLT)

Investors do not have to look back many months to find a time when the short interest in Level 3 was well above 100 million shares. That number got down to 84.8 million in August, but jumped up to 99.1 million in September.

Level 3 has been something of a a sub-$5 darling. Until it topped $5. But, from early 2004 to early 2006, Level 3 traded below $5, and, quite often traded over 20 million shares a day.

The stock now trades at $5.46, fairly near it multi-year high of $6.

After three years of falling revenue and massive operating losses. Level 3 broke through in the last quarter. Its revenue hit $1.53 billion, the third quarter of sequential top-line growth, and, after many quarters of losses, operating income hit $4 million. A small but important victory.

Level 3's stock has gotten expensive, at least by historical measures. After falling below $3.50 in early August, the stock is up 56%. The company did sign online video portal YouTube as a customer. YouTube uses huge amounts of bandwidth moving video across the internet, but it is unclear how much money this represent. Level 3 also handles VoIP traffic for a number of companies.

The other trend helping Level 3 is that bandwidth, which was dirt cheap from the internet bubble until recently, has risen in price as demand rises due to more audio, data, and video running across the web.

Does Level 3 have a promising future. Probably, yes. Has the stock gotten ahead of itsself. Some shorts think so.

Douglas A. McIntyre can be reached at He does now own securities in companies that he writes about.

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