This post is kind of an educational post. A lot of people are currently talking about WEN and JACK. I want to give you some advice on what to look for in such a turnaround / squeeze setup.
Normally, if you want to compare a company to another you will look into financials and P/E ratios and revenue growth etc. But for this comparison all of the named does not matter as much. So instead of looking at P/E ratios what am I looking at to see, if a stock is likely to squeeze or turnaround?
# 1. Squeeze setup
First of all I'm looking into the size of the float and the amount of short interest. The size of the float determines how easy it is to move the price of a stock and also if it's easy for shorts to find shares if they want to cover. The amount of short interest determines the amount of shorts being forced to cover during a sudden spike in price, which will result in buying, leading the price even higher.
more shorts -> more buying -> more squeeze
Now what mix of these metrics is a good setup for a shortsqueeze? Shorts have to cover and buy back their shares, if the price rises above a certain level. In order to squeeze shorts you want to get the price up to this level as easily and fast as possible. So the float (and also the MCap) of a company has to be very small if you want to push the price up with only little capital and volume. Now if you compare WEN and JACK you will see that the float of WEN is 10 times as big as JACKs float. Also the MCap of WEN is roughly 5 times bigger. This means that to move the price of WEN shares, you need way more buying volume and capital inflow than to move the price of JACK shares.
So in conclusion:
For a squeeze to happen you need high short interest and a big jump in price, which forces the shorts to cover. This jump in price can much easier be achieved with a company with low float and MCap than with a company which has larger float and MCap.
Short Interest WEN 29.83% < 40.17% short interest JACK
Float WEN 173.2m > 16.72m float JACK
MCap WEN 1.58b > 301.55m MCap JACK
If you look at these metrics, you can see that JACK has much better values in every metric. So it is much more likely to squeeze.
# 2. Turnaround case
A turnaround is even more complex. I try to break it down to the 2 main causes of a failing company.
The first one is debt. If a company is unable to pay its debt it goes bankrupt or has to take on more debt to pay the old debt, which will result in a downward spiral. To find out if a turnaround is in the realm of possibility, you should look at the debt of a company in relation to cash and cashflow. If a company has no cash and a negative cashflow it‘s always bad. If a company has lots of debt and only a small positive cashflow it‘s also bad. So for turnaround you either want to see if a company is able to turn profitable and reduce their cashburn (otherwise the will have to take on more debt) or if they are able to increase their cashflow and pay off debt. So what does this mean for both of the companies I mentioned?
WEN debt $4.8b > $2.58b JACK debt
WEN cash $299m > $43m JACK cash
WEN NCF $59.4m > 17.1m JACK NCF
Now if you compare these values, you can see that JACK has a way higher debt/cash ratio than WEN showing increased leverage. It‘s NCF to debt ratio is also much smaller which means, that it will be much harder/ take much longer to pay back the debt. Still both companies have a positive cashflow, what makes it possible to pay back the debt although it gets increasingly harder the more leveraged a company is. So here WEN seems to be more likely for a turnaround.
The second thing I think is important for the turnaround of the company is revenue and earnings. For a good company it is important to have positive earnings because thats the only way to sustainable scale it and increase value for the shareholders. In this particular case, revenue is also interesting because it shows if the business is failing in general or if the costs of the product are just to high. A reduction of these costs while having stable revenue can also turn earnings positive. But this only works if revenue is not in steady decline. If the latter is the case, sooner or later you won‘t be able to cut enough costs in order to keep earnings positive. So how are the numbers of our companies looking?
Revenue WEN $540.6m > $254.3m JACK revenue
Earnings WEN $22.7m > $10.2m JACK earnings
Net margin WEN 4.2% > 4% JACK net margin
You can see that both companies have positive earnings and nearly equal net margins of 4%. So they are not burning cash but also not generating that much. If a sudden decline in revenue or spike in cost happens, this could turn their margins negative. So apart from WEN being the bigger company, earnings- and marginwise they are on the same level. So for a turnaround they should both focus on increasing revenue growth and cutting costs to improve earnings and margins. But which of stock is more likely to achieve a turnaround?
In my opinion this mostly depends on the capabilities of the C-Suite. Good management is what makes a turnaround possible in the first place. The new CEO of JACK has proven his skills at scaling Taco Bell during challenging times. The CEO of WEN is also a known industry figure and had great success at Potbelly. So again both companies seem to be equal. You could now talk about brand recognition etc. but thats really subjective. So I would argue that a turnaround is possible for both companies, although it is more likely to happen to WEN because of their smaller debt and leverage ratio.
# My takes:
Better setup for a squeeze: $JACK
Better setup for a turnaround: $WEN
Numbers were taken from 10Qs of last quarter and MarketWatch.
Positions:
I own 1000shares of JACK with an average of $13.5
NFA