Cross Country Healthcare: Short Squeeze Potential
- Cross Country Healthcare has shown strong growth from acquisitions, the company is profitable, and many analysts expect growth in adjusted earnings per share by 2024.
- The combination of a high short percentage and a high buyback yield makes it an ideal candidate for a potential short squeeze.
- Even if the short squeeze fails to materialize, the stock is interesting to hold in the short and long term.
Cross Country Healthcare (NASDAQ:CCRN) provides staffing services for healthcare clients in the United States. The stock has been in an upward rally since mid-2020 and has already risen sharply from $6 then to $26 now. It looks like the strong upward rally will not be over soon, as a high short interest and share buybacks may push the stock to higher levels. Cross Country Healthcare is also interesting to hold long term because the financials look good and the stock currently appears undervalued.
2022 Fourth Quarter And Full-Year Results
Cross Country Healthcare announced its fourth-quarter results for 2022 and full-year results on Feb. 22. Revenue fell 2% for the fourth quarter, but it was higher than analysts had expected. Adjusted EPS came in at $1.09 (down 22%), which was also higher than analysts had expected. Looking at annual data, the company performed strongly, as revenues were all-time high, and the company achieved its highest annual profitability.
Revenues in 2022 were 67% higher year over year than in 2021 and the gross profit margin was 22.4%. With cash flow from operations of $134 million, the company had a good year compared to 2021 (cash flow from operations of $86 million). The physician staff segment performed particularly strongly with sales up 84% year over year thanks to increased volume in several specialties. With the acquisition of Mint Medical Physician Staffing, LP and Lotus Medical Staffing LLC in October last year, and HireUp Leadership, Inc. in December last year, Cross Country Healthcare can continue to grow and expand its presence in the field of staffing services.
The outlook for the first quarter of 2023 is a bit mixed. Revenue is expected to decline by 25% and adjusted earnings per share are expected to fall in the range of $0.70 to $0.80. However, 5 analysts expect adjusted EPS for fiscal year 2024 to be around $3.24 (forward PE ratio of only 8). The outlook looks good with expected single-digit growth in adjusted EPS, and the forward PE ratio of only 8 is favorable. However, some investors are pessimistic about the future and are shorting the stock.
High Chance Of A Strong Short Squeeze
Cross Country Healthcare currently has a high short interest: 13% of the float is short. This reminds me of GEO Group (GEO), which at the time of writing also had a high short interest (30% of the float short). The stock then rebounded sharply in an uptrend from $8 to $12 earlier this month, which can be seen as a short squeeze. Short sellers need to cover their short position, which they do by buying shares in the open market, allowing the price to rise.
Stocks with high short interest, good financial prospects, strong balance sheets and favorable stock valuations, and of course upside earnings revisions are of interest because these characteristics are a good mix for a strong upside rally. In Cross Country Healthcare, I see similar characteristics. Its earnings were above analyst expectations, the outlook looks strong, and the stock's valuation looks attractive at these price levels.
Cross Country Healthcare announced a $100 million share repurchase program earlier in August, $35 million of which was used in the fourth quarter of last year. With $65 million outstanding, the buyback yield is still high at 6.7%. Buying shares in the open market can increase the stock price due to the increased demand and reduced supply of shares. If the share price rises significantly, short sellers can feel the heat and cover their short positions, increasing the stock price even more. I see this as a strong catalyst for further share price appreciation.
However, short sellers could also increase their positions because the short interest as a percentage of the float is “ only” 13%. The stock could feel downward pressure if they increase their short position. But if the company continues to perform strongly and the stock falls while short interest increases, buying more shares will more likely lead to strong short squeeze potential.
Valuation Seems Favorable
Cross Country Healthcare's historical financials show that the company was not profitable for many years. But now the company is highly profitable, and analysts expect further adjusted earnings per share growth in the coming years.
Currently, the PE ratio looks favorable at only 8. But in the absence of positive earnings growth historically, we could not get a good idea of the stock's valuation based on its PE ratio.
Another method to get some insight into the share's valuation is to look at the chart of enterprise value to revenues, with data from the last 10 years. This chart shows the following:
Over the past 10 years, the company has traded at a much higher ratio of enterprise value to revenues. This ratio is currently 0.375, also lower than the 3-year average of 0.47. Both the PE ratio and the EV to Revenues ratio show us that the Cross Country Healthcare is trading at an undervaluation.
Cross Country Healthcare has shown strong growth from acquisitions, the company is profitable and many analysts expect growth in adjusted earnings per share by 2024 (resulting in a forward PE ratio of just 8). However, some investors are not optimistic about the company's future and shorted the stock. The short percentage as a percentage of float of 13% is high, but the company announced that it will buy back shares, making the buyback yield high at 6.7%. The combination of a high short percentage and a high buyback yield makes it an ideal candidate for a potential short squeeze. Moreover, the stock's valuation appears favorable based on its PE ratio and EV to revenues ratio. The stock's volatility is higher than that of the S&P500, but the stock may offer higher returns. Even if the short squeeze fails to materialize, CCRN stock is interesting to hold in the short and long term.
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