Along with GameStop, movie theater chain AMC Entertainment was a short squeeze target of traders on Reddit and Robinhood.
Amir Hamja/BloombergIndividual investors became wonderfully engaged with stock picking as 2021 began. Unfortunately, many were buying stocks that had been flagged on social media as ripe for a short squeeze.
There’s nothing necessarily wrong with pushing up a stock to panic short sellers into joining the buying frenzy—but by the end of January, many of the companies targeted by squeeze campaigns had soared to valuations far out of line with analysts’ forecasts for their businesses. Traders who were still buying seemed oblivious to fundamental analysis. And in the end, sales and earnings matter.
At its Jan. 28 peak of $483, GameStop (ticker: GME) stock was valuing the company above $33 billion, even though analysts predict losses for the next few years as it shutters hundreds of its videogame retailing locations. To remind ourselves, and perhaps a few readers, how fundamentals relate to the prices of fresh-squeezed stocks, we used Sentieo.com to screen for the 20 stocks over $1 billion in market capitalization, with the highest levels of shares sold short, as a percentage of their shares outstanding. As of January, they all had a short interest that exceeded half their shares. We list them in descending order of that percentage, from Vaxart (VXRT) to Tanger Factory Outlet (SKT).
Many of the names are familiar to anyone that has followed the short squeeze targets of traders on Robinhood and Reddit. Along with GameStop, there is the movie theater chain AMC Entertainment (AMC), Bed Bath & Beyond (BBBY), and Ligand Pharmaceuticals (LGND). Over the month of January, these 20 stocks rose by a median of 80%. GameStop was up 1,600%.
What's The Value in a Squeeze?
At Monday's levels, many of these heavily-shorted stocks traded at high multiples of next-year's sales. Analysts expect no profits from most.
Data as of Feb. 1
Source: Sentieo.com
Come Monday, Feb. 1, most of their valuations looked rather stretched, according to the forecasts of the analyst consensus. On average, sell-side analysts are well-disposed toward the companies they cover, so they are unlikely to be biased against these firms, however troubled or unproven some of these highly-shorted businesses may be.
The Feb. 1 value of these shorted companies had reached a median of 23-times forecasts for their 2021 year revenues. That’s a level typically enjoyed only by the fastest-growing, profitable businesses. The $4 billion market cap of Workhorse (WKHS), which aspires to make electric trucks, was 2,000-times this year’s expected sales. Many of the companies are predicted to lose money this year, so their price-earnings multiples are negative—and by a large amount, in most cases.
A short squeeze is a technical tactic, predicated on margin calls and stock loan shortages, not fundamentals. But in the end, a company’s stock price will reflect its sales and earnings. Traders buying some of these squeeze plays may want to acquaint themselves with forecasts for the companies’ business fundamentals.
Write to Bill Alpert at william.alpert@barrons.com
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February 04, 2021 at 08:25AM
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Does Valuation Matter in a Short Squeeze? - Barron's
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