Increased Short Positions in Mallinckrodt (MNK) Stock Will Fuel Rally
NEW YORK (TheStreet) -- This is not the typical chart story I have been doing, but I thought another look at Mallinckrodt PLC (MNK) - Get Report would be interesting. In our last story, we suggested it was too late to consider a short position in the specialty pharmaceuticals company. But now, I think the shorts could be run out. How do you spell ouch?
According to www.shortsqueeze.com, the short interest in MNK has increased sharply to 9.644 million shares from 8.120 million -- a significant shift. A good location on the chart is often key to a successful short, in my opinion, and I doubt most of the recent shorts have a good location.
In the updated chart of MNK, above, we can see prices are firming toward the 50-day simple moving average. Notice the big surge in volume earlier this month as MNK got a lot of media and analyst attention. Now this is interesting -- the On-Balance-Volume (OBV) line has turned up! A rising OBV line only happens when volume is higher on days when MNK closes higher, which in my book is bullish. Also, I am very impressed with the bullish divergence between the lower price lows and the higher lows on the momentum study from August through November.
I think MNK is poised to rally and the increased short position will only add to the upside.
TheStreet Ratings team rates MALLINCKRODT PLC as a Sell with a ratings score of D+. TheStreet Ratings Team has this to say about their recommendation:
We rate MALLINCKRODT PLC (MNK) a SELL. This is driven by multiple weaknesses, which we believe should have a greater impact than any strengths, and could make it more difficult for investors to achieve positive results compared to most of the stocks we cover. The company's weaknesses can be seen in multiple areas, such as its disappointing return on equity, generally disappointing historical performance in the stock itself and generally high debt management risk.
Highlights from the analysis by TheStreet Ratings Team goes as follows:
- Current return on equity is lower than its ROE from the same quarter one year prior. This is a clear sign of weakness within the company. Compared to other companies in the Pharmaceuticals industry and the overall market, MALLINCKRODT PLC's return on equity significantly trails that of both the industry average and the S&P 500.
- The debt-to-equity ratio of 1.01 is relatively high when compared with the industry average, suggesting a need for better debt level management. Even though the debt-to-equity ratio is weak, MNK's quick ratio is somewhat strong at 1.12, demonstrating the ability to handle short-term liquidity needs.
- MNK's stock share price has done very poorly compared to where it was a year ago: Despite any rallies, the net result is that it is down by 42.57%, which is also worse that the performance of the S&P 500 Index. Investors have so far failed to pay much attention to the earnings improvements the company has managed to achieve over the last quarter. Turning toward the future, the fact that the stock has come down in price over the past year should not necessarily be interpreted as a negative; it could be one of the factors that may help make the stock attractive down the road. Right now, however, we believe that it is too soon to buy.
- MALLINCKRODT PLC reported significant earnings per share improvement in the most recent quarter compared to the same quarter a year ago. This company has reported somewhat volatile earnings recently. But, we feel it is poised for EPS growth in the coming year. During the past fiscal year, MALLINCKRODT PLC swung to a loss, reporting -$3.57 versus $0.06 in the prior year. This year, the market expects an improvement in earnings ($7.31 versus -$3.57).
- The gross profit margin for MALLINCKRODT PLC is currently very high, coming in at 74.34%. It has increased significantly from the same period last year. Despite the strong results of the gross profit margin, MNK's net profit margin of 6.00% significantly trails the industry average.
- You can view the full analysis from the report here: MNK
Any reference to TheStreet Ratings and its underlying recommendation does not reflect the opinion of Jim Cramer, TheStreet or any of its contributors.