March 2008 Archives
In case you hadn't noticed, Bear Stearns (BSC) is trading much higher since opening on Monday around $3/share. The reports say that JP Morgan Chase (JPM) is buying BSC for the price of approximately $2/share... so what gives? Why is BSC trading so much higher?
I've read several explanations today on why we're seeing that behavior. Could be that:
1.) Investors are hoping the deal will sweeten for whatever reason (perhaps expecting a higher bid from another institution?)
2.) Short sellers are covering their shorts, which last week supposedly made up 54% of the float.
Dave was interested to find out more about reason (2), so here's what I told him.
First check out: http://finance.yahoo.com/q/ks?s=jpm
Look in the right-hand column of the page and check out stats like "Shares Short" and "Short % of Float". Respectively, those #s represent the total number of shares shorted and the ratio of "shares short" to the Float. The float is smaller than the number of outstanding shares, since it represents the number of shares held by the public whereas "outstanding shares" includes all shares issued, including those shares held by insiders. Those numbers are reported to the public at minimum on a monthly basis.
As of 26-Feb-08 the "Short % of Float" percentage was 18.7%: http://finance.yahoo.com/q/ks?s=BSC
Contrast that 18.7% to JPM's 1.3% short % of float. Huge difference! Lots of people were betting that BSC stock was going to fall, so they sold shares short. The report I read indicated that last week Bear's Short % of Float hit a whopping 54%... holy cow!
Stocks that are heavily shorted, and thus have high short % of float #s (and/or high short ratios [1]) can undergo a short squeeze if a large number of those who have short positions re-buy the shares (cover their short) in a small period of time. Short squeezes can cause crazy stock pops because they create an unexpected buying demand. During a short squeeze, shorts might scramble to cover in the event of good/unexpected news, or perhaps in BSC's case massive numbers of people are locking in their profits (since presumably they had "sold short" at a higher price, say, in the $30+/share range and now can re-buy the shares to close their short position @ < $7/ share -- pocketing the difference as profit).
Not sure exactly what the scoop is, but it sure is interesting to follow! (yep, I'm a geek like that)
[1] short ratio aka "# days to cover" = the ratio of total # shares short / average daily volume. Or in other words, if the daily volume doesn't change, it will take "short ratio" # of days for all shorts to cover their shorts.
I'll catch up with more PE discussions later!
Full disclosure: I have no positions, long or short, in any of the stocks mentioned in this entry at the time of writing.
I've read several explanations today on why we're seeing that behavior. Could be that:
1.) Investors are hoping the deal will sweeten for whatever reason (perhaps expecting a higher bid from another institution?)
2.) Short sellers are covering their shorts, which last week supposedly made up 54% of the float.
Dave was interested to find out more about reason (2), so here's what I told him.
First check out: http://finance.yahoo.com/q/ks?s=jpm
Look in the right-hand column of the page and check out stats like "Shares Short" and "Short % of Float". Respectively, those #s represent the total number of shares shorted and the ratio of "shares short" to the Float. The float is smaller than the number of outstanding shares, since it represents the number of shares held by the public whereas "outstanding shares" includes all shares issued, including those shares held by insiders. Those numbers are reported to the public at minimum on a monthly basis.
As of 26-Feb-08 the "Short % of Float" percentage was 18.7%: http://finance.yahoo.com/q/ks?s=BSC
Contrast that 18.7% to JPM's 1.3% short % of float. Huge difference! Lots of people were betting that BSC stock was going to fall, so they sold shares short. The report I read indicated that last week Bear's Short % of Float hit a whopping 54%... holy cow!
Stocks that are heavily shorted, and thus have high short % of float #s (and/or high short ratios [1]) can undergo a short squeeze if a large number of those who have short positions re-buy the shares (cover their short) in a small period of time. Short squeezes can cause crazy stock pops because they create an unexpected buying demand. During a short squeeze, shorts might scramble to cover in the event of good/unexpected news, or perhaps in BSC's case massive numbers of people are locking in their profits (since presumably they had "sold short" at a higher price, say, in the $30+/share range and now can re-buy the shares to close their short position @ < $7/ share -- pocketing the difference as profit).
Not sure exactly what the scoop is, but it sure is interesting to follow! (yep, I'm a geek like that)
[1] short ratio aka "# days to cover" = the ratio of total # shares short / average daily volume. Or in other words, if the daily volume doesn't change, it will take "short ratio" # of days for all shorts to cover their shorts.
I'll catch up with more PE discussions later!
Full disclosure: I have no positions, long or short, in any of the stocks mentioned in this entry at the time of writing.
Greeeaaat, how entertaining can this PE discussion be. I mean, we're talking about Price to Earnings (PE) ratios, man. Gnarly! Let's get to the point.
The PE ratio magically incorporates the following three things in one number:
These three pieces of information can be important to consider because investors want to make money (??):
Two simple ways to to calculate a PE ratio are:
Note that (Stock price) * (Total # of outstanding shares) is also called a company's Market Capitalization or Market Cap.
You end up with the same number in both (1) and (2), which you could prove by doing some simple algebra. But what does it all mean?
On Wall Street, people often look at the PE ratio to determine whether a stock is "cheap" or "expensive." Surprisingly, a $5 stock is not necessarily cheap and a $500 stock is not necessarily expensive. In general, lower PE ratios point to cheaper stocks and higher PE ratios point to more expensive stocks. Note that I prefer to use the terms cheaper and more expensive; reason being, I like to keep things relative where possible/appropriate.
There is no one perfect PE threshold that indicates stock cheapness. It's not so simple that we can say "Hey, this stock has a PE of 5 (or 10 or 15)... it must be a steal!!"
When evaluating if a stock is cheap, sometimes people just look at the PE number itself; sometimes they compare PEs among stocks within an industry or sector; sometimes people compare a stock's PE to the average PE of all stocks in the S&P 500 index. Also, some people say that high PE stocks are too risky for them; others say that low PE stocks do not offer enough upside potential to be worth their time and money.
People use the PE ratio in all sorts of ways, and the list goes on and on, but the bottom line is that it relates the company's stock price, # of outstanding shares, and annual earnings all in one "simple" number.
I hope I've got you hooked, because there's more to come in the next installment later this week!
The PE ratio magically incorporates the following three things in one number:
- how much profit the company makes in a year
- the stock price
- the number of outstanding shares
These three pieces of information can be important to consider because investors want to make money (??):
- Profit is important: the more profit, the better for the shareholder.
- Stock price is important: the lower I can buy the stock and the higher I can sell it, the better.
- The number of outstanding shares is important: when the company makes a profit, how big of a slice do my shares represent in the profit pie?
Two simple ways to to calculate a PE ratio are:
- PE = (Stock price) * (Total # of outstanding shares) / (Annual net income)
- PE = (Stock price) / Annual Earnings per share (EPS)
Note that (Stock price) * (Total # of outstanding shares) is also called a company's Market Capitalization or Market Cap.
You end up with the same number in both (1) and (2), which you could prove by doing some simple algebra. But what does it all mean?
On Wall Street, people often look at the PE ratio to determine whether a stock is "cheap" or "expensive." Surprisingly, a $5 stock is not necessarily cheap and a $500 stock is not necessarily expensive. In general, lower PE ratios point to cheaper stocks and higher PE ratios point to more expensive stocks. Note that I prefer to use the terms cheaper and more expensive; reason being, I like to keep things relative where possible/appropriate.
There is no one perfect PE threshold that indicates stock cheapness. It's not so simple that we can say "Hey, this stock has a PE of 5 (or 10 or 15)... it must be a steal!!"
When evaluating if a stock is cheap, sometimes people just look at the PE number itself; sometimes they compare PEs among stocks within an industry or sector; sometimes people compare a stock's PE to the average PE of all stocks in the S&P 500 index. Also, some people say that high PE stocks are too risky for them; others say that low PE stocks do not offer enough upside potential to be worth their time and money.
People use the PE ratio in all sorts of ways, and the list goes on and on, but the bottom line is that it relates the company's stock price, # of outstanding shares, and annual earnings all in one "simple" number.
I hope I've got you hooked, because there's more to come in the next installment later this week!
