Veteran analyst thinks this stock could be the next meme-stock short squeeze (original) (raw)

Let's take a sentimental journey and renew some old memories.

Back in the day — specifically Feb. 13, 2020 — the singer and actress Jennifer Lopez joined with retailer Designer Brands (DBI) to announce the JLO Jennifer Lopez collection, a line of footwear and handbags.

"Since the beginning of my career, I've wanted to do it all — music, movies and fashion,” Lopez said in a news release. “There are so many facets to my career, and that's what I wanted to bring to my collection with DSW.”

Oh, we were so young and innocent back then. Who could've known that just a month later, states would begin implementing shutdowns to stop the spread of Covid-19?

And who could've predicted that the following year Lopez would get back together with Ben Affleck (for a little while, anyway)?

And who could've possibly foreseen that in the Year of Our Lord Bennifer 2.0, the investing world would be upended by the meme-stock frenzy, where Reddit users in the r/Wallstreetbets forum got behind struggling videogame retailer GameStop (GME) , which was being heavily shorted by hedge funds?

A veteran trader reviews Designer Brands' recent results.Shutterstock Shutterstock

Designer Brands CEO: improvement 'muted'

Other stocks, including AMC Entertainment (AMC) , Blackberry (BB) , Nokia (NOK) and Bed Bath & Beyond (which later went out of business) were soon added to the manic mix.

A study by University of Michigan Law School cautioned against viewing the meme surges on 2021 as simply the product of the Covid-19 pandemic or Reddit social boards.

"Instead, systematic digital transformations in all facets of the financial markets have allowed retail investors to coordinate their expressive preferences for companies," the report said.

Among other factors, the study said major online brokerages suddenly abolished commissions in 2019, which encouraged many more retail investors to participate in the stock market.

"Meme trading is here to stay," the report said.

And meme trading might be an issue with Designer Brands, according to TheStreet Pro's Stephen Guilfoyle, who noticed the Columbus, Ohio, retailer's stock was up recently even the company's second-quarter results "were not pretty."

Designer Brands' earnings and sales figures were down from the previous year and fell short of expectations

The company, which owns the Designer Shoe Warehouse chain, also lowered full-year guidance, reducing its full year net sales growth outlook to “flat to low-single digits” percent from “low-single digits.”

During the Sept. 11 earnings call, Chief Executive Doug Howe told analysts that the company "made continued progress on our plan to return Designer Brands to growth."

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"As anticipated, we did see consistent improvement in our top-line performance throughout the quarter and have now experienced three consecutive quarters of sequential comp improvement," he said.

He noted that "we've been particularly pleased with our back-to-school business, which has carried its momentum into the third quarter supported by our expanded athletic and athleisure offerings."

"However, with consumers being increasingly mindful of their discretionary spend, that improvement has been more muted than anticipated," Howe said.

Telsey Advisory lowered its price target on Designer Brands to 6from6 from 6from10 and kept a market-perform (effectively neutral) rating on the shares.

Despite the shortfall of the Q2 results compared with market expectations, the company was "particularly pleased" with its back-to-school business, the investment firm said.

With the challenging macroeconomics and footwear market, however, visibility to achieving the prior FY26 targets on the original timeline remains difficult, Telsey said.

Veteran trader sees 'possible pain trade' in Designer Brands

Guilfoyle noted that Designer Brands' quick ratio, which measures a company's ability to meet its short-term obligations with its most liquid assets, "stands at a paltry 0.25."

"Now, we usually cut retailers some slack on their quick ratios due to the inventory-centric nature of the business," he said. "But we are a little concerned here as its cash balance is down 21% since February, while inventories, whose values often depreciate over time, are up 12.5% over that same time frame."

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Designer Brands was down 1.7% at last check, but Guilfoyle noted that the shares were up 8% on Sept. 17, up 2.24% in the previous session and up 11.73% in the one before that.

"That's incredible," he said. "Why is that, after posting lousy numbers for the quarter, cutting guidance and running negative free cash flow for the past six months?"

Guilfoyle said that as of Aug. 30, nearly 94% of the entire DBI float was held in short positions.

"While I see absolutely no reason to invest in this stock, there could be a trade here," he said.

Guilfoyle discussed the stock's simple moving average, which calculates the average price during a specified period and can help determine whether an asset price will continue or will reverse a bull or bear trend.

"With the stock's 50-day [simple moving average] nearby, a jump over that hurdle could really scare the stuffings out of the shorts," he said. "You could have something along the lines of a potential meme-stock situation here."

This is not a "set it and forget it" situation. Guilfoyle explained, adding that "one who gets long something for a trade will have to either set stops as the stock rises or remain quite attentive."

"I would not call this opportunity knocking, at least not in the traditional sense," the veteran trader said. "What it is is a possible pain trade for someone else that could turn a quick buck for those at the ready."

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This story was originally published September 18, 2024, 6:47 PM.