Imperial Sugar: Hitting the Sweet Spot

Imperial Sugar's (IPSU) stock price has been on an absolute tear lately, rising almost 24% to $15.70, from last month's all time low of $12.66 (hit on 6/12/08). IPSU's relative strength has been off the chart when compared to the DJIA which retreated approximately 9% within the same period.

The Driver: A spike in sugar prices has provided the catalyst for the share's rapid rise as the price of sugar has recently rallied 28% from .11/lb to almost .14/lb. The strength in sugar pricing was partially attributed to Brazil's delayed crop start and a shift in acreage to more profitable crops by India and Pakistan as well as the overall effects of the commodity boom.

Analyst coverage: The single analyst providing research coverage is BWS Financial, with a sell recommendation in place. The analyst is forecasting a third quarter loss of .59 on revenues of $104 million. The problem is, the analyst estimates are based on "worst case" scenarios and are not modeled with the possibility of a rally in sugar prices.

BWS's Hamed Khorsand's bearish stance could soon see an "about face" as the chances are good he will soon upgrade the shares. Khorsand will most likely pontificate that the increase in the price of sugar as well as the progress IPSU has made rebuilding its Port Wentworth refinery are the catalysts for his upgrade. I expect the company to report third quarter results substantially better than expectations.

High short interest: IPSU's short position of 1.8 million shares out of 11.9 million shares outstanding is significant, representing a staggering 15%. This is high when compared to Amazon (AMZN), one of Wall Street's notoriously favorite stocks to short, with a 9% short position. IPSU's short ratio of 16, means it would take sixteen days of average daily volume for the entire short position to be covered.

This large short situation is a budding "powder keg" as these "borrowed" shares must eventually be purchased back. These shares represent potential buying power (demand creation) and the prospects of a classic "short squeeze" occurring in the event that any good news emerges.

Probable trading range: The shares appear to have support near the $15 area and resistance at the $20 mark. The trend is your friend, and it has been in a straight up mode the past five weeks. It might be time to ride the momentum train on this one as the shares could run up another 25%, nearing $20, before eventual selling pressure surfaces.

Disclosure: Long.

Comments

[Ames Tiedeman:]

Why was a sell rating placed in the first place?

2008 Jul 13 10:02 AM

[Mark Krieger:]

You got me on that question. The analyst seems to be out of touch with reality on this one as IPSU's cash value alone is greater than the analysts target price.

2008 Jul 13 11:34 AM