DreamWorks Animation Shares Hit 3-Year High As Short Sellers’ Bets Go Sour
DreamWorks Animation Q3 Earnings Fall But Still Beat Analyst Estimates
I expected shares to be up after yesterday’s report, where Q3 revenues and profits soundly topped analyst expectations. But I didn’t think DreamWorks Animation would be +18% in afternoon trading, after touching $33.02 — the highest it’s been since September 2010. What’s going on? “It looks like a short squeeze” — the aftermath of bet by short sellers that went bad — says Sterne Agee’s Vasilly Karasyov. Short sellers profit when a company’s stock price drops: They borrow shares, sell them, and then repurchase them at what they hope will be a lower price. That looked like a safe gamble for DWA. Its stock had appreciated 40% over the 12 months ending yesterday. And it appeared ready to fall as some analysts projected that the studio would have to report an impairment charge for its summer release, Turbo, a box office disappointment. Janney Capital Markets’ Tony Wible — one of just two analysts urging investors to buy the stock — says DWA is “a hated name [on Wall Street] with a high short position.” If the company beat expectations, though, it would be “the recipe for a big boost that is likely aided by short covering.” And DWA did surprise.
CEO Jeffrey Katzenberg said that Turbo will be profitable — likely due to to unusually strong sales of either the upcoming DVD or toys and merchandise — and that the studio’s looking forward to 2014 where its film slate will face relatively little competition from other animated films. Once it was clear that the stock price wouldn’t fall, short sellers were in a bind — and are out buying shares to cut their losses.