DIS - Paramount Global: Short Squeeze As Potential Catalyst

2023-04-26 02:04:33 ET

Summary

• Paramount's short position has increased to the same level as late 2020, which helped support a rapid price advance into March 2021.
• With strong-hand holders like the Redstone family and Warren Buffett, any good news could create a vacuum of sellers while short covering explodes on the buy side.
• A serious imbalance of share supply/demand could push the stock quote straight up, regardless of a Wall Street bear market generally or recession in economic activity overall.

One of my more frustrating investments over the past four years has been Paramount Global ( PARA ) ( PARAA ). The stock price has made wild swings with cycles in the economy and Wall Street thinking of the moment. It’s traded as low as $10 after the COVID pandemic started to as high as $103 on a meme-led short squeeze in early 2021. Yet, for the most part, the quote has hovered in the $20s and $30s.

W hat’s changed since my last bullish article on Paramount last year? The answer is an overly-confident and significant short interest position has been built over the last nine months. Just like the 2020 pandemic recession caused short sellers to pile into bets on a lower Paramount stock quote, the middle of 2022 to early 2023 has witnessed a similar sentiment from bearish traders. In effect, today's short position approaching 20% of share float has “oversold” the stock price beyond where it would be trading otherwise.

If and when traders decide to cover their shorts (putting in buy orders), a real imbalance in share supply/demand could support a monster upmove back to $30 or even $40, all other variables remaining the same. Plus, this spike in price could happen in the face of a bear market generally for the U.S. stock market (which is my present forecast), or even during growing news reports of a recession.

Background

One of the top media companies in the world, owning a valuable major U.S. television network in CBS , the enterprise has branched out to streaming media content through Paramount+ and the free to consumers advertising-based Pluto TV, which is a cross between Alphabet/Google ’s ( GOOG ) ( GOOGL ) YouTube and cable television (having a goal of many thousands of channels sooner or later).

Warren Buffett ’s Berkshire Hathaway ( BRK.A ) ( BRK.B ) has acquired a material stake because of Paramount’s value characteristics, alongside a high dividend yield (4.3% currently). And, with long-time controlling shareholder Sumner Redstone passing a few years ago, the odds of a breakup or takeover of the company have increased dramatically. I have written about and continue to believe Paramount assets would make a great fit for Netflix ( NFLX ), which could richly benefit from a widening moat of owned content plus a live streaming network for paying subscribers.

The valuation story is still compelling, although earnings have been in decline during 2022-23 because of a rotten online and television ad marketplace going into a possible U.S. recession. The company does carry a high level of debt, with rising interest costs. So, a double whammy of rising expenses for labor, content creation and debt service have combined with weaker top-line sales to really crunch margins. Wall Street is forecasting the business setup will only be slightly profitable in 2023.

Below are graphs of the enterprise value picture on EBITDA cash flow (11x) and revenues. You will notice the valuation on sales is getting incredibly depressed for a media business, with an EV ratio now well under 1.0x, even lower than the pandemic panic selloff.

Comparing these all-inclusive numbers with debt and cash figured into the valuation, peer media businesses as a group are priced at lower multiples of EBITDA, but much higher ratios on sales. My sort list for a competitor/peer group includes Netflix, Walt Disney ( DIS ), Fox ( FOX ) ( FOXA ), Warner Bros. Discovery ( WBD ), AMC Networks ( AMCX ), Nexstar ( NXST ), Alphabet/Google, and Meta Platforms ( META ).

The good news is margins and earnings are projected to rise markedly after 2023’s near disaster. Wall Street analyst estimates are calling for a strong upturn in net income, based on assumptions of a better ad market and minor raises in streaming subscription charges per customer.

Short Squeeze Approaching?

So, if operating business results bottom in 2023, what catalyst could help ignite a rise in the share quote? For Paramount in particular, the rising short interest position is a truly bullish development, in my view.

Believe it or not, the short position total as a percentage of outstanding shares issued has roughly doubled since August to almost 16%. The raw size of the short interest is now on a par with late 2020. And, these bearish bets are easily 5x the rate experienced by other media peers on average.

When you subtract the Redstone family ownership stake, the percent of share "float" sold short is even greater at nearly 18% (in the April exchange report). Using this data point, the short position is a good 3x higher than any other peer.

Finally, the days to cover ratio (which looks at average trading volume vs. the whole short position) has risen to approximately 10x, which is about the same as the highest bear readings of late 2020 (not pictured). This ratio is double any other peer/competitor and almost 5x the median average for the group. Of course, if positive operating news is our future, sellers will step back and want higher prices at the same time as short sellers scramble to buy.

2020-21 Short-Squeeze Moonshot

Why are extended short positions important to consider for price forecasts? Basically, extra selling (with borrowed shares) in a profitable and valuable underlying business suppresses price to a level far lower than would otherwise be the case. In the end, any reason for shorts to cover works in the opposite way, where it pushes price higher to find supply to execute transactions. If you have twice as many buyers as sellers one day, for example, anxious short buyers may be willing to pay a dramatically inflated price to get out of their presold and borrowed positions. In theory, short seller losses could be "unlimited" if they cannot find shares to cover their position.

The once-in-a-generation GameStop ( GME ) short squeeze of early 2021 is real-world proof of what can happen to price when a monster imbalance of anxious buyers vs. no share supply exists.

Anyway, Paramount did experience a rather robust short squeeze at the same time as GameStop, drawn below. On the dividend-adjusted chart of daily trading action between January 2020 and June 2021, we can review the whole exaggerated short-selling price effect in the first half of the graph, vs. the short covering rally into March 2021. Abnormally large swings in price are what short sellers accomplish in the end.

In my mind, we may be entering the same juncture on the chart today as August 2020, marked with the green arrow. Paramount is trying to get above its 200-day moving average in April 2023, with the net short position reaching a similar extreme as 2020.

On the current chart, you can see Paramount is also trading just below several trendlines (green and gold) that can be drawn connecting the high trades in price over the last 13 months.

Looking at some bullish momentum indicators, the 20-day Chaikin Money Flow reading reached its highest level during January in years (circled in green). The Negative Volume Index is highlighting a healthy buying trend on weakness. And, the 21-day Average Directional Index is suggesting a low-volatility balance between buyers and sellers, similar to the late 2022 bottom in price around $16 (circled in blue).

Buy Plan

For traders, the best way to play a developing short squeeze may be to wait for a price break above $23.50 to $24 per share. That way if a recession pulls price lower first (which is entirely possible), you won’t be stuck with a short-term loss waiting for better days to appear. The easiest plan would be to place a stop-buy order in this range, holding your brokerage cash earning interest until a clearer price reversal becomes reality.

I do own a small position currently and am weighing when and how to increase my position size. Absent my bearish market view today, I would likely be adding shares this week. So, it may depend on your take on overall market risks. For sure, if Paramount can break above $24, the green light to add shares will be harder for me to ignore.

What could go wrong? Basically, the continuation of rising interest rates and/or a deep recession in America would act to hold the value/price of Paramount under $25 to as low as $15 the rest of the year (last November’s low price). For value investors and bottom fishers, prices under $20 may prove a great entry zone for long-term thinkers. That’s why it’s difficult to sell in the low-$20s. You may really kick yourself if a quote above $40 is coming in 2024.

The upside bullish argument is a short squeeze, asset sales to reduce debt, or even a merger agreement with a bigger entity like Netflix, Amazon ( AMZN ), Google, or Apple ( AAPL ) sends the Paramount quote dramatically higher. With a number of potential catalysts and a low asset valuation for this leading media business, I would rather hold shares and focus on buying a larger position.

Thanks for reading. Please consider this article a first step in your due diligence process. Consulting with a registered and experienced investment advisor is recommended before making any trade.

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