What happened
Shares in robotic cleaning company iRobot (IRBT 13.15%) soared 49.6% in January, according to data provided by S&P Global Market Intelligence.
Sometimes the biggest news is that there wasn't any news. At least, there wasn't anything from a company-specific or end-market perspective to change the investment thesis on the stock during the month.
Image source: Getty Images.
But it's impossible to ignore the elephant in the room, or in this case the Reddit-influenced short squeezers in the room. The extraordinary trading activity at GameStop has led many investors to seek out the next candidate, and many have settled on iRobot as an option.
The (perfectly legitimate) idea behind buying heavily shorted small-cap stocks is based on the perception of a trade with a favorable risk/reward skew. The speculators are hoping that the price will start rising, causing short-sellers (who often borrow money to do so) into closing their positions. Closing a shorting position involves buying back stock, and this forces the price even higher.
Given the violent price movements, heavy volume of shares traded, and association with Reddit boards, it appears that iRobot stock has gotten mixed up in the GameStop phenomenon.
Data by YCharts.
So what
It's impossible to know right now if this phenomenon will last the course or go the way of the tulip mania.
What investors can control is the price they are willing to pay for iRobot stock. If you think that the consumer discretionary stock is worth holding on 52 times its estimated 2021 earnings, then you will just ignore the noise around the speculation.
However, if you are not so confident in the company's valuation and are concerned about iRobot's pricing power in the face of growing competition, then the rise will have created an opportunity to sell the stock.
Now what
iRobot will release its fourth-quarter earnings report on Feb 10. Given that those results will cover the crucial holiday sales season, the report will provide many clues as to iRobot's sales and earnings in 2021.
When all the speculation dies down, investors in iRobot will still own a stake in a company with earnings and cash flow. For long-term investors, the important thing to know is what that is actually worth, rather than following short-term trading trends.
