J2 Global: Huge Short Position Could Help Push The Stock Higher
Summary
- J2 Global is set to report first quarter earnings results on May 10.
- Analysts expect the company to post solid earnings and revenue growth for the quarter.
- The stock rallied over 150% in nine months before a recent pullback.
- Short sellers are extremely bearish on the stock and have established a huge short position.
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I was looking at the earnings calendar for next week and running some basic scans for companies that are reporting and have good fundamental ratings. That’s what led me to look at J2 Global (JCOM) more closely. What I found was a company with good fundamentals, a stock that is in an upward trend, and has plenty of pessimism directed at it. J2 is set to report earnings on May 10 and analysts expect the provider of internet-based telecom services to report solid growth.
The current consensus estimate for Q1 results is EPS of $1.66 and revenue of $363.2 million. If those estimates are accurate, it would mean earnings growth of 18.6% and revenue growth of 9.3% compared to Q1 2020.
J2 Global has averaged earnings growth of 12% per year for the last three years while revenue has grown at an average rate of 10%. In Q4 2020, earnings jumped 31% and revenue increased by 16%. For 2021 as a whole, earnings are expected to increase by 11% and revenue is expected to increase by 10.9%.
All in all, those are pretty decent growth rates.
The company does even better when it comes to its profitability measurements. The return on equity is at 30.2% and the profit margin is 34.2%. J2 scores very well in the valuation metrics as well. The current trailing P/E is 14.5 and the forward P/E is 13.1.
Given the earnings and revenue growth, strong profitability measurements, and the low valuations, the overall fundamental picture for J2 Global is really good.
Big 9-Month Rally Moved the Stock up 154%
Turning our attention to the weekly chart for J2, we see that the stock didn’t hit bottom in March 2020 like so many other stocks, but rather it hit its low in July of last year. The low back then was $53.24, and boy did the stock take off from there. The stock recently peaked at $135.24 on April 20 and has since pulled back a little over 12%. What I found most interesting about the chart was how neatly the highs from the last nine months all connect.
I took the liberty of drawing a second trend line, one that is parallel to the trend line that connects the highs. I can’t really call it the lower rail of a trend channel because the low from October is the only point of connection so far. If we see the stock drop down to the $114 area in the next week or so and then reverse higher, we would have our lower rail.
One benefit to the recent pullback is that it has moved J2’s overbought/oversold indicators out of overbought territory. Both the weekly stochastic indicators and the RSI had been in overbought territory since November with the exception of one week in January. The dip could take some of the pressure off the stock and may be an indication of some skepticism ahead of the earnings report. Even if it isn’t a reflection of skepticism, it certainly suggests that investors are exercising caution ahead of the earnings report. This could be a good thing because it is a sign that optimism isn’t running rampant. When there is an abundance of optimism ahead of an earnings report, it’s more difficult for a stock to climb after the report.
Incredibly High Short Interest Ratio Could Add Buying Pressure
Even as J2 has soared over the last nine months, and even though it has great fundamental indicators, that hasn’t kept short sellers from making a big bet against the company. The short interest ratio is a whopping 20.4 currently with 5.8 million shares sold short. The ratio has jumped from 11.9 to its current level in the last few months as the short interest has grown slightly while the trading volume has dropped considerably. Regardless of the reasons for the big change, if the company was to post a big earnings beat and an upbeat forecast, short sellers could be forced to cover their position and that would add considerable buying pressure to a rally.
Analysts have a different opinion for J2 and they are rather bullish. There are 11 analysts covering the stock at this time with nine “buy” ratings and two “hold” ratings. This gives us a buy percentage of 81.8% and that is higher than the average buy percentage which falls in the 65% to 75% range.
J2 Global doesn’t see a great deal of option activity, but the put/call ratio is at 1.06 currently. There are 4,861 puts open and 4,604 calls open at this time. All told, those options represent 946.5K shares and that is significant when compared to the average daily trading volume. The ratio does fall in the average range, but it is significantly higher than it was back in February when the company last reported earnings. On February 11, the put/call ratio was only 0.83 and it did trend higher for a few months, but it dropped sharply in early April. The ratio was all the way down to 0.77 on April 7 and has been trending higher ever since. The fact that the ratio is trending higher suggests that investors are becoming more bearish or more cautious.
My Overall Take on J2 Global
To me the overall outlook for J2 Global is pretty bullish. The fundamentals are strong with the ROE, profit margin, and low valuations being particularly attractive. The earnings and revenue growth rates are good and appear to be getting better.
Seeing the stock drop over the last few weeks might concern some people, but I think it’s a good sign for the stock because it has brought it down out of overbought territory. It also suggests that shareholders are being cautious and aren’t overly optimistic. I find that when investors are overly optimistic, it is almost impossible for the company to meet or exceed expectations and a drop is almost inevitable after an earnings report. Because we are seeing some selling ahead of the report, I find that refreshing—as if some of the pressure is being taken off the stock.
The sentiment toward J2 is mixed, but the extremely high short interest ratio really stands out and could be a key factor in pushing the stock higher. If the stock is in fact in a trend channel like I believe it is, there is support in the $114 area. If it remains in that channel and starts moving higher again in the next few weeks, those short sellers may have to cover their positions and that will add fuel to the rally.
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This article was written by
Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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