When badly beaten ASX shares bounce: Don't confuse strength with short covering
Is the bounce genuine strength or just shorts covering?
Source: Unsplash
Mentioned
KEY POINTS
- PointsBet briefly rallied 12.6% on Wednesday, only to give back most of those gains
- Zip has experienced two consecutive days of massive intraday swings, closing towards session lows
- Both stocks are heavily shorted, according to Shortman
When a stock that's down 80-90% from all-time highs begins to bounce, you can't help but to wonder 'maybe the bottom is in'.
There's been some interesting price action from beaten up names like PointsBet (ASX: PBH) and Zip (ASX: ZIP). Here's a closer look.
PointsBet: A short-lived bounce
PointsBet shares are down -67% year-to-date and -77.7% in the past 12 months. It's a bookmaker that's got a stable business in Australia and trying to capture as much market share as possible in the United States. This comes at the expense of immense cash burn, which doesn't really bode well with the current trough in capital raisings and high interest rates.
PointsBet shares briefly rallied 12.6% on Wednesday on no news, to a six week high of $2.50. The bounce was short-lived, with the stock closing 4.1% higher and now down -3.9% on Thursday.
Its worth noting that PointsBet is the 25th most shorted stock on the ASX, according to Shortman, with 6.24% short interest.
PointsBet intraday chart on Wednesday 19 October (Source: TradingView)
Zip: Fade the news
Zip has experienced a similar narrative as PointsBet, trying to grab market share in what was once a relatively new industry at the expense of massive cash burn. The stock is down -84% year-to-date and -90.7% in the last 12 months.
The stock staged a powerful bounce on Tuesday, up 14.3% and closed at session highs. The price action over the next two days was rather funky.
Wednesday:
High: +3.7%
Close: -5.9%
Thursday:
High: +12.8%
Current +3.1% at the time of writing
Zip also released its first quarter FY23 update on Thursday, where management reassured investors that the company is focused on lowering credit losses, right-sizing its global cost base and moving towards positive cash flow.
However, as the price action might suggest, the announcement was more of a catalyst for investors to get out.
According to Shortman, Zip is the 10th most shorted stock on the ASX with 7.85% short interest.
Zip share price chart (Source: TradingView)
