Short Squeeze Puts Tootsie Roll Industries in the Spotlight
Tootsie Roll Industries, the company behind a number of classic candies including their namesake chocolate taffy-like candy as well as Junior Mints, Charms lollipops, and Razzles, unexpectedly came into the media spotlight recently. Founded in 1896 by an Austrian immigrant, the company has traditionally maintained a low corporate profile. Who would have thought about Tootsie Rolls and a short squeeze?
No one predicted that the company would be starting off 2021 by sharing the media spotlight with the likes of GameStop, AMC Entertainment, and Nokia. Tootsie Roll’s stock became a target for short squeeze action by day-traders on online forums. Tootsie Rolls has historically been one of the least volatile stocks on the market. Yet, within a single week at the end of January 2021, its stock price nearly doubled.
The sudden interest in Tootsie Roll stock was unrelated to any major recent corporate news or other announcements. Rather, some investors had noticed its short squeeze potential. Short squeezes were also behind the rapid increases in silver prices, GameStop shares, and other securities targeted by Reddit users.
What is a Short Squeeze?
A short squeeze is a rapid increase in the price of a stock due to intensive short selling. The rising stock price forces traders that had bet against the stock to buy the stock in order to cover their losses. The urgent purchasing of the stock to cover short positions drives the price up even more. This creates a reinforcing loop, squeezing short sellers out of their positions and benefiting the investors behind the short squeeze. An extreme type of short squeeze, called a gamma squeeze, was responsible for pushing GameStop’s stock price wildly high during January 2021.
Thus, in a short squeeze situation, the increase in stock price is not linked to the underlying fundamentals of a company. Fundamental analysis looks at a company’s intrinsic value, financials, and economic factors such as earnings reports, merger announcements, industry trends, and macroeconomic conditions to approximate the value of a security.
Which Stocks Are at Risk?
Two key variables can help identify stocks that are prime candidates for a short squeeze—short interest and short interest ratio.
Short interest refers to the total number of shares sold short as a percentage of the company’s float. A company’s float refers to the number of shares that are publicly available for investors to trade. Stocks that become the targets of a short squeeze often have abnormally high short interest values.