Could this ASX 200 share be heading for a short squeeze?

The term ‘short squeeze‘ might cause different reactions for different investors. Perhaps especially so when it comes to the JB Hi-Fi Ltd (ASX: JBH) share price.

JB Hi-Fi has been one of the best-performing ASX 200 retail shares in recent years. In fact, JB Hi-Fi shareholders have enjoyed a roughly 400% return over the past 10 years from share price appreciation alone.

Throw in the company’s lucrative dividends and we probably have more than a few happy shareholders. But JB Hi-Fi has also been struggling more recently.

We saw the retailer hit a new all-time high of $56.85 a share back in March. But by mid-June, the company had hit a new 52-week low of $36.69. That’s a three-month slide of more than 33%.

Since June, the JB Hi-Fi share price has recovered substantially. It closed at $45.55 on Friday, up more than 30% from those June lows.

But let’s get to the ‘short squeeze’ part.

Why would JB Hi-Fi shares get short squeezed?

So according to reporting in The Australian today, short-seller interest in JB Hi-Fi shares has risen to 5.11% of the issued capital.

This prompted James Nicolaou, senior advisor at Shaw & Partners, to declare: “If recent history means anything, a big short squeeze [is likely and JB] stock is going higher… JBH has rallied higher every reporting day now for seven straight results”.

JB Hi-Fi is indeed scheduled to report its full-year results for FY2022 next Monday (15 August). Nicolaou is arguing that JB Hi-Fi shares consistently rise after company results are released, so the shares will be subject to a short squeeze because of the higher interest from short sellers.

Short selling a share refers to the practice of borrowing shares from another investor and selling them immediately, with the promise to buy them back and return them at a later date. If the sold shares fall in value between when they are sold and bought back, the shorter makes a profit.

A short squeeze can occur when a company’s share price rises. This rising price increases the risk of a short seller losing money on their short position. If the rise is substantial, it can force the short sellers to buy back the shares early and ‘cover’ their position to ensure they don’t lose even more money. This buying pressure can send the shares up even higher, creating the ‘squeeze’.

This is what Nicolaou is arguing could happen with JB Hi-Fi shares next week. But we’ll have to wait and see if this scenario plays out.

In the meantime, the last JB Hi-Fi share price of $45.55 gives this ASX 200 retailer a market capitalisation of $5.03 billion, with a dividend yield of 5.93%.

The post Could this ASX 200 share be heading for a short squeeze? appeared first on The Motley Fool Australia.

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Motley Fool contributor Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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