What happens if a company that isn't expected to do well surprises Wall Street with much better-than-expected earnings?
If it's a real good company with a high-priced stock, pretty much nothing. But if it is a company that's supposed to be ailing and has disappointed many times before, you get a rocket, one so powerful that you would think that it got a takeover bid. And when you have a bunch of these in one day, you can move whole sectors and, to some degree, the market itself.
Wednesday we got not one, not two, not three but four situations and their stocks performed so well that we have to ask how is it possible that these moves can occur without warning?
Before we get to the specifics of the stocks in question, let me put what I am about to say in a context that can help you make money.
The process of investing is, when you think of it, pretty simple. You like a stock, you buy it. If it goes higher, you can sell it and make a profit.
Same thing goes the other way. If you don't like a stock, and you think it is going lower you can sell the stock and if it goes lower you can buy it back and make money. I know for many of you that process, short-selling, is well known. But since we are teaching here, I want everyone to be on the same playing field because there is a complication that some are not aware about.
When you buy a stock, it's pretty simple, you get the stock in your account. When you sell it, though, you are supposed to have the stock to give to the buyers. Same thing with the short-seller. He has to have the stock to give to the buyer he short-sells it to. That means he has to borrow the stock first. When the stock goes down he buys the stock back and closes out the trade.
Oh, and here's another wrinkle that makes the transaction less favorable than outright buying. The stock of a failing company stops at zero. The stock of a company that does well? It can, theoretically, go to infinity.
All of these less favorable glitches in short-selling can make it so shorting can be incredibly painful, if not untenable, for those who can't take pain. That's because a heavily shorted stock of a company that surprises in its reports, can really get out of control in what's known as a "short squeeze," where those betting against a stock scramble to buy it back or cover, and there isn't enough stock to buy back at current levels so it skyrockets.
Today we had short squeezes in so many stocks, Skyworks Solutions (SWKS) , New York Times (NYT) , Capri Holdings (CPRI) , the old Michael Kors, and Snap (SNAP) , that they actually stabilized a market that I think otherwise really wanted to go down.
So, let's start with Snap, a social media company I harpooned for ages. Here's a company that just hasn't been able to shoot straight. It missed forecasts and spent hundreds of millions of dollars on long-term contracts to host traffic that seems to have started to dry up. The only thing more unnerving than the endless shortfalls and failed redesigns was the departure of not one but two chief financial officers in a very brief period of time, the last of whom walked away from restricted stock units that could have been worth a lot of money.
Who would ever do that if the stock were going to go up?
The stock had become an annuity for short-sellers.
And then Wednesday morning, out of nowhere, CEO Evan Spiegel, who I think has matured beyond years since this company came public last year, reported a truly excellent quarter, with good growth and nice stabilization in users. To quote him from the call: "Although 2018 was challenging in many ways, we are proud of the significant changes we have made to strengthen our company and grow our business over the long-term. We brought together a more experienced leadership team, improved our core product to better serve our community and built scalable infrastructure for our advertising business." He went on to say, "We did all of this while growing full year revenue 43% year-over-year and bringing profitability within reach." So much about the worries about the balance sheet. Instead we might have a worthy competitor to Facebook (FB) and Twitter (TWTR) for some social media dollars. I'm done with my criticism. The site lost a lot of luster but it sure isn't worth shorting anymore.
Next, Capri, the old Michael Kors, Wednesday morning reported a quarter that, to me, may have set up the fashion company for a multi-year runway. CEO John Idol has taken the old Kors brand and added Jimmy Choo and then most recently Versace, two excellent but undermanaged lines and I think he's created the next retail colossus. Idol put out some numbers Wednesday that gave you a multi-year roadmap to make these three brands the publicly traded envy of the rest of the industry. I have studied these brands and I think that they have never looked stronger and the international opportunities are insanely positive.
The company had gotten away from big logos that are the latest and greatest and I think that Idol has gotten over the travails of the Kors watch business -- decimated by Apple (AAPL) -- and is now producing some of the most fun, whimsical and luxury goods that are fresh and outside of the box. I am a big Jimmy Choo shopper and I can't tell you how many times I have gone there hoping for new merchandise to give my wife, top influencer Lisa Detwiler, and they never had anything new. Drove me crazy. Now the lines are so fresh that it's going to cost me a fortune. The stock's price-to-earnings multiple is the lowest in the group despite the huge influencer population on the web. It can go much higher.
The New York Times? What can I say? The president created his own nightmare of a short squeeze by constantly calling it failing. We took a look at it two years ago when it was at $17 and found that Trump has been an incredible spur to online sales. Today it produced a quarter that showed not only is it not failing, it's become the poster boy for the subscription economy and the stock squeezed up ten percent. It's not done, as the president is a virtual flywheel for the Old Gray Lady. All the money that's fit to print.
Finally, there is Skyworks Solutions, a stock of a company that was supposed to be crushed by the fact that it is known mostly as an Apple supplier. The shorts have been coining money on each quarter and on every bit of bad news from Apple.
Wednesday, though, we saw a terrific quarter and a story, not about the woes of the customer it is not allowed to name by agreement but about the upcoming theme of Skyworks as a dominant player in 5G, the next-generation cellphone iteration.
What a godsend that Skyworks comes forward because so many people have been blown up trying to ride the 5G wave via Qualcomm QCOM, which has multiple patent suits with Apple that threaten the company to the core.
Skyworks, on the other hand, has a terrific balance sheet and a fantastic, conservative CEO, Liam Griffin. Frankly, I am a huge fan but was stunned myself how strong the business is. How strong? It ignited the entire semiconductor group including Intel (INTC) , which has been going up non-stop since it reported a so-so quarter, and Micron Technology (MU) , which has had no good news out there but it's been running like mad.
I know it seems counterintuitive that we could be led by short-squeezed stocks. However, when you have four of them? Let's just say it makes a ton of sense as a prop for a day that could have been down a lot more if these former ugly ducklings didn't become beautiful white swans.