What happened
Shares of Party City (PRTY -60.00%) rose as much as 11.4% on Tuesday before settling into an 8% gain as of 1:26 p.m. ET. The reasons for the rise were likely twofold.
First, on Tuesday, inflation numbers came in from the Bureau of Labor Statistics. While headline inflation of 8.5% came in slightly higher than expected, "core" inflation, which excludes volatile food and energy prices, came in at a 6.5% annual pace, which was slightly better (lower) than expected. That led to a rise in stocks, generally, but since Party City is a consumer discretionary stock with a high level of debt, it's particularly sensitive to macroeconomic conditions and interest rates.
Second, today's outsized rise may be piggybacking on yesterday's gain, when it was revealed that the company's largest shareholder bought about $1 million more in stock.
So what
On Monday, a filing with the Securities and Exchange Commission (SEC) showed that CAS Investment Partners, a value-focused hedge fund run by Clifford Sosin, bought a little more than $1 million in stock on April 7 at a price of $3.31. The hedge fund now owns a touch more than 19.5 million shares, more than 17.3% of shares outstanding, worth about $70 million.
It's always nice when investors show confidence in a beaten-down stock like Party City. It's down 37% on the year, even accounting for today's rise, and down a whopping 84% from all-time highs set back in 2015, shortly after the company's initial public offering.
Why is it down so much? The pandemic certainly played a role, as Party City sells goods used for in-person gatherings. But even though the company is a "reopening" stock, it's struggled post-pandemic as the delta and omicron variants took hold and had to deal with its large pile of debt.
Party City has a market cap of $414 million but a whopping $1.284 billion in debt, as of Dec. 31, 2021. That's nearly 4.5 times the midpoint of this year's adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) guidance that was given on the recent earnings release in February, with interest expenses projected to eat up a third of adjusted cash flow.
Since Party City's interest rates are so high, it's very sensitive to the outlook for interest rates, as it will likely have to refinance debt for years to come. When the core CPI numbers came in slightly better than expected on Tuesday, it likely led to a bit more optimism that the Federal Reserve won't have to jack up interest rates as far or as fast as some feared. That being said, there's still a high degree of uncertainty on this front.
Image source: Getty Images.
Now what
Party City's market cap is extremely low, so there's the potential for massive upside if the company's operating performance leads to growth and cash flow that allows it to pay down debt. The company also carries the high risk associated with its debt, some of which carries an interest rate as high as 8.75%.
For the risk-on investor or perhaps customers who know Party City's business very well, the company could be worth a look. Just keep in mind, this is a high-risk stock in which the possibility of bankruptcy is real.
