Michaels Soars as Shorts Get Nervous (NASDAQ: MIK)

Amongst the sea of green that equities have been over the past few weeks, one stock, in particular, shone brightly and caught the attention of Wall Street on Monday.The Michaels Companies, a Texas-based arts, crafts, and home decor chain, have like many stocks been on a burner since the lows of March.

By the time the bell rang last Friday, shares were up 470% over the past ten weeks. If investors went into the weekend with smiles on their faces, they only smiled brighter yesterday when the stock popped another 58% from Friday’s close to put it a full 800% higher than March’s low.

JPMorgan Upgrade

As we noted in our Three Consumer Stocks Moving Up On Analysts Support article yesterday, the catalyst for this latest jump was an upgrade from JPMorgan, whose analysts came out super bullish on the sales momentum that the company is carrying through Q2. They’ve included the stock in the company’s U.S. Equity Analyst Focus List and added in a note that “given increased optimism around the pace of economic recovery and a wide divide in the valuation of haves (essential retailers) and have nots (value/just reopening/levered names), we looked at our universe for upgrade opportunities and believe MIK represents the best upside potential at current prices".

In particular, they highlighted the company’s ability to capture market share from beleaguered competitor A.C. Moore who is currently going through liquidation. Michaels is taking on the lease of 40 of the 145 stores that are being shut as well as one of their East Coast distribution centers.

JPMorgan’s analysts raised the stock to an Overweight rating from Neutral and slapped a fresh $13 price target on it, up from the previous $7 which the stock hadn’t even hit yet. Even with yesterday’s pop, their new target suggests there’s still room for another 50% spurt.

Against the Grain

This is an interesting turn of events for a company that was very much on the back foot coming into the COVID-19 pandemic. Through the middle of February, just about when US equities started their collective nose dive, Michaels was trading down 83% from 2016’s all-time highs and down 50% from the start of 2020 alone. Monday’s jump puts the stock right back at early January levels.

Management themselves must be shaking their heads at the stock’s performance because as recently as last Thursday when the company reported their fiscal Q1 earnings, things were not looking good. At -$0.43, EPS was firmly in the red and missed big time the black print of $0.15 that analysts had expected. Revenue was also light on expectations and down a full 26% from the same period last year.

To be sure, there was major and unprecedented pandemic underway for much of last quarter and non-essential brick n’ mortar stores were shuttered across the country. That being said, management is forecasting that all 1,273 of their stores across the country will be open again by the end of June but given last week’s earnings report and the stock’s performance coming into COVID, JPMorgan’s call is still astounding.

Are We Seeing a Short Squeeze?

There’s talk of a short squeeze starting to get underway and this would help explain some of the recent action. Perhaps the big driver there is the fact that of their stores that reopened in May, demand was much stronger than expected and actually higher than past years according to CEO Ashely Buchanan who is a former Walmart COO. With parents and kids under lockdown and sheltering-in-place, it appears that all those home arts and crafts projects finally got underway and Michaels was the go-to destination for supplies.

It looks like the bears' argument that they’re going to go out of business like so many other brick n’ mortar stores is running out of steam fast. And with upwards of 40% of the float short through last week, there’s going to be a lot of short-sellers getting nervous if the stock keeps making double-digit percentage jumps on a daily basis.