2 Recent Short Squeeze Stocks That Are Now Attractively Valued
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Short squeezes have been happening in many corners of the market over the past few weeks, driven largely by millennial investors who are specifically motivated to crush Wall Street shorts. The recent short-squeeze wave started as a group discussion on an online forum, Reddit, where retail investors started piling up GameStop (GME) stock.
The stock had nearly 138% of its float sold short and prices surged nearly 300%, causing dramatic losses to hedge funds. The trade worked so well that the trend soon spilled over to other highly shorted stocks, causing massive spikes in both share prices and volatility.
While a large portion of some companies’ shares were sold short by pessimistic hedge funds, some of them genuinely belong in investment portfolios on their own merits because the short-lived, short-squeeze saga has now weakened considerably. We believe Bed Bath & Beyond Inc. (BBBY) and AMC Networks Inc. (AMCX) are two such stocks. We think they could prove to be long-term winners on the back of improving fundamentals because the prices of both stocks have now returned to earth, providing a better entry point.
Bed Bath & Beyond Inc. (BBBY)
BBBY is an omnichannel retailer that operates a chain of retail stores, selling a wide assortment of merchandise in the Home, Baby, Beauty, and Wellness markets. The company sells domestic amenities and other products to retail shoppers and institutional customers in various industries. In addition to its e-commerce website, the company had 1,391 stores in all 50 states as of last November.
BBBY became a favorite of Reddit traders in January as short-sellers held more than two-thirds of the shares on Jan. 25. From an $18 level at the beginning of the year, the stock surged 197.8% to hit its 52-week high of $53.90 on Jan. 27. This represented a more than 75% jump in just three trading days.
However, the stock has since cooled down to most recently close at $26.29, representing a more modest 48% year-to-date gain. In terms of forward p/s, BBBY has recently been trading at 0.36x, 74.1% lower than the industry average of 1.39x. In terms of its trailing-12-month p/b ratio, BBBY is trading significantly lower than the industry average (2.38x vs 3.51x).
BBBY recently selected Oracle Corporation (ORCL) as its Enterprise Resource Planning (ERP) technology provider. Oracle Cloud will provide real-time financial, supply chain, and merchandising solutions. On Jan. 19, BBBY sold its non-core Cost Plus World Market asset to Kingswood Capital Management, a private equity firm. The move has streamlined BBBY’s portfolio, and the proceeds of the sale will help it fund its business transformation to generate more cash.
In its fiscal third quarter, ended Nov. 28, 2020, BBBY generated a top line of $2.62 billion, declining 5% year-over-year. However, the quarter marked its second consecutive quarter of comparable sales growth, fueled by digital sales growth.
Its comparable total enterprise sales growth was 2%, while its digital comparable sales growth on total enterprise was 77%. BBBY added approximately 2.2 million new online customers. In addition, it reported an adjusted EPS of $0.08 versus its year-ago adjusted loss of $0.38 per share.
In the last quarter, BBBY has made meaningful improvements to its digital-first, omni-always customer experience and enhancements to its Contact-less Store, Curbside Pickup, and Same Day Delivery service offerings.
With a new management team recently taking over the company’s brand and marketing management, we believe BBBY’s shares have enormous upside because the new management is expected to significantly improve the company’s sales, reduce costs, enhance digital offerings, and outline solid business management plans in the near term.
BBBY’s POWR Ratings reflect this promising outlook. The stock has an overall rating of B, which translates to Buy in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors with each factor weighted to an optimal degree. BBBY has an A grade for Momentum and a B for Growth. It is ranked #35 of 64 stocks in the A-graded Home Improvement & Goods industry.
In total, we rate BBBY on eight different levels. In addition to the POWR Ratings grades I’ve just highlighted, you can see the BBBY’s ratings for Value, Stability, Sentiment, and Quality here.
AMC Networks Inc. (AMCX)
AMCX is a global entertainment company that owns and operates various cable television brands, production companies, ad platforms, and streaming services in the United States as well as internationally. Known for its popular and critically acclaimed content, AMCX’s portfolio of brands includes its flagship AMC, WE tv, BBC America, IFC, and SundanceTV. The company operates in two segments – National Networks and International and Other.
AMCX had a short float of 60.2% on Jan. 25. Thereafter, the stock soared from $35.60 at beginning of the year to hit a 52-week high of $73.00 on Jan. 27. In fact, the stock surged as high as 70% in just four trading days. The stock has now taken a breather, however, to close most recently at $50.48, with a year-to-date gain of 41.1%.
In terms of forward p/e, AMCX has recently been trading at 8.90x, which is 52.7% lower than the industry average of 18.80x. In terms of trailing-twelve-month p/s ratio, AMCX is trading significantly lower than the industry average (0.95x vs 1.80x).
On Feb. 3, AMCX entered into a new strategic partnership with Shaftesbury, a Canada-based award-winning production company. The partnership aims to generate growth for Shaftesbury’s existing and future slate of content across all genres, creating more opportunities for Canadian creators in front of and behind the camera. The partnership also builds on AMCX and Shaftesbury’s existing production relationship.
AMCX is scheduled to release its fourth quarter and full-year 2020 earnings results on Feb. 26. In the third quarter, the company reported $654 million in revenues, declining 9% year-over-year and reflecting a 17.3% decrease in the National Networks segment, but an increase of 9% in the international segment.
However, AMCX ramped up production again during the quarter after pandemic-related restrictions caused severe disruptions earlier last year. Its EPS for the quarter was $1.17, compared to a year-ago value of $2.07.
AMCX has been maintaining a strong financial profile, with a solid balance sheet, robust liquidity, and healthy levels of free cash flow. The company is fast becoming the global leader in subscription video on demand (SVOD) services for targeted audiences, and it continued to make significant progress on its digital initiatives last year.
In addition, TV advertising has made a comeback, which should bode well with AMCX’s struggling ad segment. Further, Wall Street analysts expect AMCX’s current year revenue and EPS to improve 3.8% and 32.7%, respectively.
It’s no surprise that AMCX has an overall rating of B, which equates to Buy in our POWR Ratings system. AMCX also has an A grade for Quality and a B for Value. In the 18-stock Entertainment – Media Producers industry, it is ranked #4. Click here to see the additional POWR Ratings for AMCX (Growth, Momentum, Stability, and Sentiment).
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