Shares of Tootsie Roll Industries (NYSE:TR) were spiking on Wednesday — yes, I said Tootsie Roll. Historically, this is one of the least volatile stocks on the market. But that’s changed in recent days. As of noon EST today, the stock was up 13% but had been up 53% earlier in the session. And it’s up roughly 45% just this week. Believe it or not, this could be the start of a short squeeze.
You’ve likely become more familiar with the term over the past few days, but for those who haven’t, allow me to briefly explain a short squeeze. As investors, we can bet against a company by shorting the stock, profiting when it goes down. But if it goes up, so too does our loss on paper. Losses are theoretically unlimited when shorting stocks, so brokerages often require you to have enough funds to cover your paper losses. Failure to do so results in short traders covering their position at a loss before they’re ready — they’re “squeezed” out. And it can be a snowball effect, with closed short positions sending the stock higher and squeezing even more out.
With Tootsie Roll stock, almost 42% of the float is sold short, according to Yahoo! Finance. But what makes this case particularly complicated is Tootsie Roll’s low trading volume. When shares don’t trade hands often, it can take shorts longer to cover their positions. According to FINVIZ.com, Tootsie Roll stock has the seventh-highest short ratio among companies with a market cap over $300 million (among stocks on major exchanges).
Given its past trading volume, it would take approximately 34 trading days for shorts to cover their Tootsie Roll positions. In other words, this squeeze could take a long time to play out.
Short squeezes usually need a catalyst — positive and unexpected news from the company that completely changes the short thesis. But these days, the incredible gains from GameStop‘s epic short squeeze have investors searching for stocks with short squeeze potential. That happens to include Tootsie Roll stock.
Therefore, today’s spike for Tootsie Roll stock wasn’t caused by something material to shareholders. However, in the short term, short-squeeze mania could make this more volatile than shareholders of this dividend stock are used to.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.
View more information: https://www.fool.com/investing/2021/01/27/why-tootsie-roll-stock-is-suddenly-spiking-higher/