Many heavily shorted companies are done so due to their weakness to potential bankruptcy. However, sometimes a company gets a heavy short interest without any apparent weakness. That still makes shares susceptible to a squeeze.
That may be what happened last week with shares of Tootsie Roll (TR). The confectionary firm saw its price soar to nearly $60 per share in intra-day trading, only to come back to its more recent price trend near $30.
In hindsight, it’s easy to see why. Insiders own 34 percent of shares. And institutions own another 34 percent. That leaves very little float of available shares for funds to short. As of mid-January, over 40 percent of the float was being held short.
While the company has struggled in the past year, it has a strong, cash-rich balance sheet. And even with a drop in revenue in the past year, the 12 percent profit margin is above-average for the food space.
Action to take: While a further squeeze is unlikely, shares of the company look attractive now that the squeeze is over. This is a perfect stock to buy for traders, given the company’s slowly-growing dividend payment.
Should the short interest still be high and susceptible to another squeeze, traders can target the June 2021 $35 calls. Last trading near $4.75, the bid/ask is closer to $3.50 and dropping as implied volatility does. Traders may want to wait for a price under $3 to buy.