The aggressive covering of short-sold Steinhoff stock, also known as a short squeeze, could be the cause for the retailer’s 50% share price surge the past two days, one stockbroker says.
As a share price unexpectedly starts to climb, a short squeeze often follows as short-sellers scramble to buy shares to cover their positions. Short-sellers "borrow" shares to sell in the belief that the share price will fall. When the opposite happens, they have to buy shares to mitigate their losses.
Petri Redelinghuys, founder of Herenya Capital Advisors, says Steinhoff is still the third most shorted stock on the JSE.
He said a mixture of restored market confidence following a restructuring proposal, the release of Steinhoff’s interim results, and a short squeeze might have combined to produce the dramatic increase in share price.
He expects another short squeeze could be coming.
“Steinhoff’s share price is very likely to remain extremely volatile for the next month as traders and investors alike take positions based on what they believe the future of the company might be, although the potential for the stock to see large gains in the coming weeks is rather high due to the conditions for a violent short squeeze being present,” Redelinghuys told Business Insider South Africa.This means Steinhoff’s shares might be drastically inflated – and could plunge if Steinhoff does not manage to bed down formal agreements with its creditors.
Steinhoff’s share price shot up from R1.90 to R2.81 between Tuesday and Wednesday morning, a 50% increase, after the JSE-listed multinational released a restructuring proposal to creditors.
According to its most recent unaudited interim results, Steinhoff has an estimated €9.4 billion (R148 billion) in debt compared to its total equity of less than €3.8 billion (R60 billion).
The four key proposals in Steinhoff’s restructuring plan of its subsidiaries Steinhoff Europe AG (SEAG), Stripes US Holding Incorporated (SUSHI) and Steinhoff Finance Holding GmbH (Finance Holding), are:
Redelinghuys, who gave Steinhoff a 50% chance of survival in May when it was revealed that it faced four lawsuits totalling over R60 billion, now believes Steinhoff has a 65% chance of survival.
“We are still not entirely sure what the exact amount is the company have to write down in accounting irregularities. PricewaterhouseCoopers might come back with a report revealing vast black holes in the company,” Redelinghuys says.
“There are still a lot of unknown variables which [demand] caution.”
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