Shares of retailer hhgregg, Inc. (HGG) rose sharply on Monday, climbing more than 13.14% on slightly higher volume.
The Indianapolis-based specialty retailer of home appliances and consumer electronics saw its shares jump $0.80 to close the day at $6.89 a share.
In Monday’s session, just over 343,000 HGG shares traded hands, compared to the company’s average trading volume of more than 231,000 shares.
The day’s unexpected rise was well received by investors, who have seen the company’s shares decline more than 55.6% year to date.
Shares of hhgregg reached a 52-week high of $15.21 exactly one year ago. And the stock reached a 52-week low of $4.57 about two weeks ago on November 4.
So the latest uptick has left many investors wondering what sparked the sudden increase, and whether or not the move is sustainable.
A Short Squeeze in the Works?
Since there were no company news releases coming from the retailer on Monday, the most likely reason for the price spike was data about the retailer released by the Nasdaq.
The Nasdaq announced that for its October 31, 2014 settlement date, hhgregg shares saw a decline of 563,008 total available shares for shorting. This represents a 13.16% decrease in available shares, leaving 3,715,953 shares to short.
Now, if you’re wondering why a net reduction in available shares for shorting could cause a stock to rise, any reduction in available shares greatly affects the “days to cover” calculation. That is, the number of days it would take to close out all open short positions if every share traded represented a short position being closed.
And with the 13.1% reduction, hhgregg’s days to cover declined from 22.2 days to 12.4 days – a 44.1% decline.
Now, there are two possible reasons for this decline: 1) Short sellers are no longer expecting the stock to continue declining from its current levels, or 2) a long position elsewhere was closed out where HGG had been shorted as a hedge.
In either case, any decrease in available shares would result in a sudden rise in share prices, and that’s exactly what happened.
But it brings up another important question…
Is hhgregg a good “Buy” at these levels? Not so much…
While a case for shorting the stock may no longer apply, that doesn’t mean there’s a compelling case for going long.
In its fiscal Q2 earnings report, the company posted a $0.37-per-share loss on light revenue. Compared to the $0.12 gain per share the company reported a year earlier, that represents a significant decline of 408.3%.
The loss caught analysts off guard, as they expected a $0.01-per-share gain.
On the top side, the company reported revenue of $505.8 million, a decline of 10.9% year over year.
This number also missed analyst expectations of $532.1 million.
And based on the sheer number of negative earnings revisions, hhgregg shareholders are likely to see the company continue to struggle.
In the last quarter, downward revisions have been reported 10 times, which has caused the company’s earnings estimates to move lower – falling from -$0.31 to the current -$0.82 per share.
At the end of the day, a long position in hhgregg would be a mistake.