With sentiment in the major equity indices gaining robustly in the new year, some traders have an eye on speculation, as indicated by recent upside for Edible Gardens (NASDAQ:EDBL). Specializing in locally grown organic produce, Edible Gardens struggled since its public market debut last year. However, speculators anticipate EDBL stock could be a short-squeeze candidate based on the lack of shares available to short.
Significantly, Edible yesterday announced a planned reverse stock split of its common shares at a ratio of 1-for-30. EDBL stock began trading today on this split basis. “We are pleased that stockholders approved our charter amendment to effect a reverse split of Edible Garden’s common stock,” stated Jim Kras, CEO of Edible Garden.
The chief exec added the following:
“The reverse split is being implemented because we believe it will allow us to meet Nasdaq’s minimum bid price requirements, among other listing requirements. We also believe that the increased market price of the common stock that is expected as a result of implementing the reverse stock split could improve the marketability of the Company’s shares.”
To be sure, Edible’s reasons for the reverse split of EDBL stock aligns exactly with the common incentives the U.S. Securities and Exchange Commission spelled out: raising visibility and/or compliance with an exchange’s minimum price requirements.
Speculative Sentiment Targets EDBL Stock
While a reverse split might allow EDBL stock to stay in the game, it also presents viability concerns. As the Financial Industry Regulatory Authority (FINRA) mentioned, “Reverse stock splits are less common among seasoned companies that trade on one of the major U.S. stock exchanges.”
Further, FINRA warns, “Reverse splits tend to go hand in hand with low-priced, high-risk stocks. This is especially true with reverse splits that result in a post-split share price that is many times the price of the stock’s current price.”
However, in the current bad-news-is-good-news environment, some speculators may be tempted to take the contrarian approach. Indeed, data from Fintel notes incredible volatility in the number of shares available to be shorted at a leading prime brokerage. Two days ago, the short shares availability metric stood at 400,000. At time of writing, this stat now sits at 100.
Adding fuel to the fire, the short borrow fee transitioned from highly elevated to slightly more so. For instance, at the start of the Jan. 20 session, the borrow fee stood at 62.59%. As of the latest data, this metric hit 69.8%.
As TheStreet recently stated, “The common range of borrow fee rates is 0.3% to 3% per year. However, when there is high demand for a short sale target, it’s not uncommon to see borrow fees exceeding 20%.”
However, it’s also fair to point out traders only hold 3.54% of the float of EDBL stock short. Further, the short interest ratio sits at only 0.11 day to cover. Compared to the figures seen in other short-squeeze candidates, the aforementioned metrics don’t ring much of an alarm.
Why It Matters
While reverse splits don’t materially affect the value of the underlying security, they tend to carry a poor reputation. If investors perceive the move as largely cynical, they can lose confidence and dump shares. Since its public market debut, EDBL stock has dropped nearly 90% of equity value.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.