Is Smile Direct Stock (SDC) the next target for WallStreetBets Short-Squeeze?

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SmileDirectClub (NASDAQ: SDC), a Nashville-based oral health company, caught the eye of Reddit’s WallStreetbets investment forum. The famous retail army thinks they’ve found the next GameStop (GME) or AMC Entertainment (AMC) in SDC. Smile Direct Stock overtook Tesla and Alibaba to become the most talked about company on the WSB forum over the past week, with nearly 1,400 mentions. Of course, this alone does not indicate whether Smile Direct will increase. However, WSB has almost 11 million users and when combined they have considerable purchasing power. Therefore, forum sentiment is a critical factor in determining whether a stock has short-squeeze potential.

Below, we analyze and discuss several key metrics to help investors decide whether SDC will live up to the forum hype.

Courtesy of SwaggyStocks

Decline in share price

First of all, for a stock to have any squeezing potential it has to be unloved and trading near 52 week lows and SDC certainly does the trick. Smile Direct’s stock has had a scorching spell in 2021 so far. SDC started the year at $ 12.00, peaking at $ 16.08 in 2021 in January. Currently, the stock is trading at $ 6.00, down 50% year-to-date and 62% below the January high.

Smile Direct Stock (SDC)

Low investor expectations

Smile Direct’s most recent earnings fell short of analysts’ expectations, leading several banks to downgrade the stock.

Second quarter 2021 earnings showed a loss of $ -0.14 per share, compared to an estimated $ -0.09 (-55.60%). However, revenue reached $ 174 million compared to the same period in 2020, although it was well below the expected $ 198.5 million. As a result, Wall Street’s consensus rating went from “buy” to “hold”.

Weak trading updates and analyst downgrades are important as existing shorts become comfortable with their positions. Additionally, negative hedging often encourages new sellers into the stock, strengthening the determination of the bulls.

Increase in short-term interest

SDC short interest
SDC short interest

Stock float: 104,310,000

Running Short interest: 39,090,000

Short percentage float: 37.47%

% increase / short decrease: 14%

Short sales of Smile Direct (SDC) shares have been steadily increasing since the start of the year. The latest exchange data shows that shorts total 39,090,000 shares, representing 37.47% of the available free float of 104,310,000. As a rule, stocks with a short interest greater than 10% are considered subject to a short-squeeze. Thus, with a short-term interest of 37.47%, Smile Direct has strong squeeze potential.

Increased costs of direct stock at short smile

Smile Direct Stock Short
Cost of borrowing

Cost of borrowing: 24.88% per annum

Increase / Decrease over 7 days: -5.37%

The cost of borrowing SDC shares has risen sharply in recent times. Currently, SDC lenders require interest payments set at 24.88% per annum.

Why is this important?

Rising borrowing costs make it more expensive to hold a short position. Typically, as short-term interest increases and less inventory becomes available, the cost of borrowing increases. The rise often forces the shorts to hedge their positions and return the shares to the lender. This, in turn, pushes the price even higher, encouraging more short covers and triggering the squeeze.

Short-term interest, cost of borrowing and price

SDC Short Squeeze
Price / cost of borrowing / short term interest

The chart above shows that Smile Direct stock hit an all-time low of $ 3.64 in April 2020, with short-term interest hitting a record 41,882,856 shares in the same month. High short-term interest rates pushed borrowing costs to 238% in May. As a result, short sellers began to unwind their positions, which caused Smile Direct stock to jump 180% from the April low to $ 10.25 in May.

Current market conditions are similar to April 2020. Smile Direct stock is trading in the low end of the 52 week range. In addition, short-term interest and borrowing costs have increased significantly recently, increasing the potential for squeeze.

Days to Cover (DTC)

Smile Direct club Stock

Ratio of days to cover: 3.35

7 day increase / decrease: -13.7%

‘Days to cover’ calculates the number of days it would take to close the number of shares that were sold short. The number of short stocks is then divided by the average daily volume of the shares for approximately the number of days needed to cover the short position. A high Days to Cover ratio can often signal a potential for a short squeeze.

Due to the recent increase in trading volume, the DTC ratio has dropped over the past month. Nonetheless, 3.35 is high and supports the compression thesis.

Smile Direct Price Analysis

The daily chart shows that the Smile Direct stock has trended lower from the January high, resulting in a downtrend capping the price at $ 6.40. Notably, after a strong start to October, SDC broke the trendline on the 6th. However, the breakout encountered air resistance towards the September high of $ 7.42, peaking at $ 7.09 and ending the day below the 100-day moving average (DMA) at $ 6.92 and back in a downtrend. Subsequently, it is essential to overcome the trend and the 100 DMA for the price to take a bullish momentum. Additionally, failure to clear trend resistance may cause the SDC to slide below the DMA 50 at $ 5.70. In this case, a return to the August low of $ 4.61 seems likely.

However, if the price breaks the September high, the bulls could gain confidence, putting the $ 8.99 200 DMA on the line. Additionally, if the price closes above the DMA 200, the stock will be considered trending higher, which could encourage short hedges, exaggerating the rally.

For now, technical analysis suggests the stock may go down. Unless price clears significant air resistance towards $ 7.40, the path of least resistance is down and does not indicate an impending price explosion. However, given the unusually high short exposure, declines to August lows are likely to find willing buyers, as are rallies.

Should are you buying Smile Direct Stock?

Our analysis shows that the SDC has the potential for a short-squeeze. The increase in short interest rates, combined with the high cost of borrowing and the high days to cover ratio, indicates that short sellers are under increasing stress. However, the current technical outlook is unclear.

That being said, GameStop’s tightening up at the start of the year had been in the works for several months. GME stock started to gain traction on WallStreetBets in August 2020 when it was trading around $ 4.00. However, it wasn’t until January 2021 that compression set in and GME jumped 1200% to $ 483. Therefore, investors should remember that while the data gives weight to a short compression, it may not develop for some time. Also, just because the share is so short doesn’t mean it’s worth buying. Short sellers, especially hedge funds, are professional and incredibly knowledgeable investors. On this basis, the stock may be overvalued at the current price.

Conclusion

Smile Direct Stock (SDC) is a good candidate for a short-squeeze based on the above data. However, this view is based only on a short analysis of interests and does not indicate an improvement in trading conditions. Buying a stock due to its high concentration of shorts is inherently risky and therefore only suitable for professional investors willing to lose all or part of their investment. However, for traders with a high risk tolerance looking for a short-squeeze target, the SDC could offer an attractive opportunity.

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