What happened
Shares of Michaels (MIK +0.00%) were sliding last month, even though there was no news out on the arts-and-crafts retailer. Instead, the combination of rising coronavirus cases and the stock's being heavily shorted seemed to contribute to a slide in the second half of the month.
According to data from S&P Global Market Intelligence, the stock finished October down 16%, and as you can see from the chart below, the stock fell steadily in the second half of the month.
So what
As of Oct. 14, 46% of Michaels' float had been sold short. This shows that investors are heavily betting against it after the stock surged following the March crash as it reported strong results, and it seemed to benefit in some ways from demand shifts during the crisis. However, a number of investors seem to doubt that the company's future profits can justify its current price.
Image source: Getty Images.
Meanwhile, rising coronavirus cases contributed to a sell-off in Michaels shares and the broader retail sector, especially in the last week of October. With daily COVID-19 cases in the U.S. approaching the 100,000 mark, investors may be fearful of another round of lockdowns, which could hit brick-and-mortar retailers like Michaels hard. Additionally, a number of e-commerce companies, including Etsy, Shopify, and Amazon, reported strong third-quarter results toward the end of the month, indicating that online demand remains as strong as in the second quarter, which could be a bad sign for physical retailers.
Now what
Despite the sell-off at the end of month, Michaels' future has brightened substantially in recent months. Analysts now expect earnings per share of $1.76 for the year, in spite of the challenges of the pandemic, giving the stock a price-to-earnings ratio of roughly five.
Meanwhile, the company's focus on arts and crafts for at-home hobbies and the improvements in its e-commerce business during the pandemic seems to make it well-positioned for another lockdown.
One thing is clear. Expect the volatility to continue with this stock as there are a lot of different cases that could send it soaring or crashing.
