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Predrag Novakovic

Shares of Student Transportation Inc. fell by as much as 10 per cent on Thursday after a U.S.-based investment firm released a report that alleged the company is in financial trouble and could cut its dividend.

Prescience Investment Group, a two-man investment fund based out of Baton Rouge, La., released a thirty-page report (pdf) that alleges Student Transportation doesn't have the cash flow to support its dividend and suggests the firm has simply covered up its problems by raising new money every time it strikes a new acquisition.

Prescience is short Student Transporation's shares, which means it benefits if they fall.

The release of the report was well-co-ordinated, and a copy of it landed in reporters' inboxes (including mine) early this morning.

After seeing its stock drop so suddenly, Student Transportation issued a statement.

"Student Transportation Inc., North America's third-largest provider of school bus transportation services, announced that there have been no material or adverse changes in the company's normal business plans or activity. The company maintains full confidence in its business plan. Our current dividend program that has been in place for the past eight years remains in place, and there have been no plans to alter or change that program.

"While we generally do not comment on reports of third parties, various individuals who state that they 'stand to realize gains in the event that the price of the company's stock falls' have issued a report that questions our business strategy and dividend policy."

The company went on to say that it had to limit what it says because it's currently in a blackout for earnings season.

While you could argue that a 10-per-cent drop isn't anything too special, keep in mind that Prescience has likely levered up its short position to amplify its gains.

The stock's down 10 per cent today. Lever up your position, and you've already made big gains.

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