While the U.S. equities sector got off to a fortuitously positive start to the new year, elevated short interest data targeting car dealership Sonic Automotive (US:SAH) suggests that at least some investors were taken aback by its resilience. Conspicuously, SAH stock gained 22.43% on a year-to-date basis through the Feb. 7 session, easily outpacing the benchmark S&P 500 index’s 8.89% performance during the same period.
One day prior, SAH stock represented one of the highlights of Fintel’s screener for unusual stock options volume. Specifically, call volume for Sonic options reached 1,907 contracts. Typically, the average call volume sits at 5 contracts. On the other end, put volume slipped to 19 contracts, fading against the average put volume of 30.
Despite the balance of trading favoring call options for SAH stock, the underlying enterprise mainly courts bearish attention. As of the close of the Feb. 7 session, Sonic’s short interest reached 29.70% of float. In addition, the short interest ratio hit 20.53 days to cover.
While definitions vary, generally speaking, short interest as a percentage of float above 20% and short interest ratios above 10 days to cover indicate extreme pessimism.
Notably, Fintel’s Short Squeeze Score – derived from a sophisticated, multi-factor quantitative model that identifies companies that have the highest risk of experiencing a short squeeze – pings SAH stock as 85.68. The score ranges from 0 to 100, with higher numbers indicating a higher risk of a short squeeze relative to its peers. A score of 50 represents average short-squeeze risk.
Although the elevated short interest stats imply significant bearish pressure, this dynamic is occurring amid an important fundamental framework. According to a May 2022 report by The Wall Street Journal, the average age of vehicles on U.S. roadways hit a record 12.2 years.
Interestingly, Eric Lyman, chief analyst at TrueCar (US:TRUE), noted that “[t]he average lifespan [of a car] is now almost 12 years.” Mathematical realities indicate, then, that several cars are approaching their replacement threshold. Significantly, even with inflationary pressures impacting consumer sentiment, SAH stock gained 17.86% in the trailing year. In contrast, the S&P 500 declined by 7.91% during the same period.
Nevertheless, analyst sentiment over the past year remains pensive toward SAH stock. Most recently, Morgan Stanley on Jan. 17, 2023 maintained its “underweight” recommendation. The most recent bullish view came from Benchmark, which maintained its “buy” recommendation on Oct. 31, 2022.
This article originally appeared on Fintel
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