Inventure Foods, Inc. (NASDAQ:SNAK) soared by 50% within the last three months above its 50-day simple moving average support level. Its short interest ratio climbed to 44 days in the middle of May, indicating high volatility going forward. It has a total of 3800 put options as open interest in the following two quarters, far more than its call options, which alert the investor to gamble on this M&A story cautiously.

Inventure Foods stock price plummeted more than 60% from $13.84 per share in December 2014 to $4.91 per share in Feb. 2016 due to recall its fresh frozen products last year. After a recent article disclosed that a few hedge funds held long positions in the stock, the price soared by 50% to $7.45 within last three months. Its 10-day simple moving average (SMA) crossed 20-day SMA, and touched 50-day SMA above the support level. (See figure 1) From a technical point of view, if the stock price breaks out above 50-day SMA and sustains the trend, it usually will draw more long position.

Figure 1.

In the middle of May, three of law firms disclosed that they filed securities class action lawsuits to sue the company for misconduct, representing investors who suffered a significant loss last year. After the firms announced the bad news, the stock price declined a little further; then it bounced back strongly and now it touched above its 50-day SMA.

However after considering all these positive sides, it is important to pay close attention to its short interest ratio and option situation to gauge if the hedge funds disclosed only part of the story. Hedge Funds have to disclose the long positions in the observance of the SEC 13F filing requirement quarterly but may hide their shorts that act as a hedge or net short positions. Since the beginning of this year, the Inventure short interest ratio has climbed to 44 days to cover by the middle of May, which is pretty high. (See Figure 2)

From one side, high short interest ratio may bring a short squeeze rally lately. However, it does not necessarily indicate bullishness. If the price continues to a proper bullish, the shorts will be forced to cover in panic, which will further add fuel to the rally. But if the rally fails and moves below the support level, the price will fall sharply.

If you look at its current option table, for a strike price of $5 on July 15, 2016, it has 3000 put options contracts and on October 15, 2016, it has 800 put options as open interest. Both of them are far more than the total number of call options. It indicates either the funds very cautiously added their long positions with large shorts or the funds had net shorts with a strong bearish sentiment. (See Figure 3)

Conclusion

The company is extremely short of cash, with a debt-to-equity ratio reaching 216% in the latest quarter. Some may bet it would be bought out by certain giants for M&A target; others may predict it may fall deeper or even go bankrupt. It is doomed to have high volatility going on, so investors should be extra cautious when gambling on this stock.