What happened
Shares of ANGI Homeservices (ANGI) popped again on Monday, continuing an impressive four-week run. As of 2:30 p.m. EDT, shares were up 15% and climbing. And since early April, shares have more than doubled in value.
There wasn't any news specific to ANGI today. But it's possible last week's earnings beat sparked a short squeeze of the stock.
Image source: Getty Images.
So what
Short sellers borrow shares and sell them at current market prices. But eventually, they must buy shares to return the ones they borrowed (cover). You win this game if the stock goes down, and you can buy shares for less than you sold them. But short sellers get stuck with a loss if they're forced to cover at higher prices.
In ANGI's case, there were a whopping 35.5 million shares sold short as of April 15 -- the most recent data point available from Nasdaq. That compares to a total of just 73.4 million shares of its Class A shares. In other words, nearly half of its shares are sold short. With average trading volume, it would take over three weeks for short sellers to cover, which is the kind of situation that can create a short squeeze if good news breaks.
And good news did break when it beat earnings expectations last week. It reported a net loss, but a slightly better loss than expected. What's more is that revenue only fell 1% in March and is only expected to fall 2% in April. So business during the height of the COVID-19 pandemic is relatively strong and could start picking up again soon. And ANGI stock popped as a result.
If you're a short seller, that's not what you want to hear; it could be enough to motivate you to exit your position. The only problem is, if enough traders rush for the emergency exits at once, it sends ANGI's stock higher and exacerbates their predicament.
Believe it or not, ANGI stock is now up for 2020.
Now what
Predicting when a short squeeze will start or end is for the soothsayers, not investors. Consider that ANGI could report bad news tomorrow, reversing the squeeze process. When investing in stocks, it's better to look for things like competitive advantages that lead to revenue growth and profitability than try to predict short-term stock swings.
There's also a possibility that today's move isn't the start of a short squeeze at all. Consider that short interest in ANGI stock has been high for some time, and shares are still down over 40% from 52-week highs. Many short sellers could still have positive returns and wouldn't panic to quickly exit their positions. In that case, I can't explain today's move at all. It's a good reminder that short-term ups and downs aren't always explainable.
