Wednesday, February 18, 2009

Short Squeeze and SNS

It has come to my attention that there may be a short squeeze in the works for Steak n' Shake. Volume has been substantially lower, which, when coupled with a higher price, means that money is coming into the stock and staying there (I'll reference John Burr Williams in The Theory of Investment Value for that 'all things equal' technical tidbit!).

Here is the case that I will lay out; keep in mind that I am 100% a value guy, who would never use technical analysis of any sort to justify the purchase of an equity... this is more of a 'noise' post that has little bearing on anything.

The Case:

Volume for SNS is quite low (compared to a few months ago) and there are still a ton of shares short (5.82 million as of 01.12 and 6.09 million as of 01.27). From the fund holdings that I can see on Yahoo! Finance, I presume that about 1/2 of all outstanding shares are institutional and are not going to be readily sold (MSD Capital, Sardar, Gamco, HBK, ect.). I also presume that there are a bunch of smaller hedge funds and people out there like me (and probably you, if you are reading this) that have no intent on selling their shares until significant price appreciation. I feel comfortable saying that around 75% of outstanding shares won't be sold for a while.

75% leaves roughly 7 million shares 'floating' around. This seems like a ridiculously low number considering there are just over 6 million shares that eventually need to be covered, as they are short positions! Heck, even if there are 10 million 'floated' shares out there, it would still be hard for all the shorts to cover their position at one time... the short ratio is an astounding 38.1! When was the last time that a company with the prospects that SNS has, had a short ratio that high? In addition, SNS had been on the short threshold list a few months ago, helping to bolster the short argument.

For the record, it would be really awesome if there were a bunch of naked shorts out there. I am not suggesting that there will be a Volkswagen style squeeze, but it may be an interesting few months-especially with management working their magic in regard turning the company around!

Maybe, by writing this, I am looking for a reason to justify the share price being depressed. Maybe I am blind to the company being ready to go out of business. Maybe Chewbacca was really the main character in Star Wars. Maybe Warren Buffett is a chump. *shrug* I don't know...

Regardless, the situation relating to the market value of SNS doesn't make a lick of sense to me.

Disclosure: I am long SNS.

I just noticed that MSD Capital has recently sold all of it's SNS holdings- this effectively adds another 2 million shares to the company's float.


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