The Geo Group Stock price bucked the trend on Friday, jumping to $7.62. Furthermore, increasing short interest could be a good sign for the GEO bulls.
Geo Group (GEO:NYSE) closed at $7.62, up +%0.42 (+5.835)
Geo Group, the real estate investment trust (REIT) that specializes in prisons, has recently come to the attention of retail investors forum ‘wallstreetbets’.
After the well-publicized short-squeezes in GameStop Corp and AMC Entertainment, the Reddit retail army has been on the prowl for their next 10-bagger.
The Geo group stock price has been on a steady decline for the last 4 years. At the end of May, GEO had lost over 85% from its $34.23, 2017 high. Moreover, the outlook only appeared to be getting worse.
In January, U.S President Joe Biden signed an executive order effectively banning federal private prison contracts. This prompted several investment banks to withdraw funding for the industry, resulting in a failed capital raise for the struggling REIT.
Considering the fatal blow to its business and a lack of funding options, it seemed logical that the stock would continue lower. However, this is 2021, the year of the retail trader.
There are several factors to consider when assessing if a stock could be vulnerable to a short-squeeze.
Firstly, we should look at how much of the available float has been made available to short sellers.
In this case shorts have borrowed 41,730,000 shares in order to bet against the price.
This represents 35.7% of the 116,770,000 publicly issued shares. This is a large number. Even more so, when you consider the daily trading volume in GEO is around 7.5 million shares.
This brings us to the next important metric, days to cover.
Based on the average daily volume, for the entire short position to be covered, it would take 5.5 days. For perspective, at the height of the January GameStop short-squeeze, the days to cover were around 6.
In my opinion, this lends to Geo Group being a prime candidate for a squeeze.
To a certain extent, technical analysis is redundant in this case. However, the daily price chart shows just how much room the stock could have to run on the upside.
GEO has remained in a descending trend channel since its 2017 high. Furthermore, the price reversed from the lower end of trend around $5.00 in late May/early June.
You could argue that in the current environment, GEO could target the upper end of the channel at $15.15, close to double Friday’s closing price.
However, it may not be a clear-cut home run. As we have seen recently, so-called meme-stocks have been using rising share prices to raise capital. Furthermore, regulators are increasingly looking at ways to prevent these violent squeezes.
Putting money into retail favorites should be considered extremely risky and not suited to the majority of investors. Of course, it’s possible the price could double, triple, or even 10x from here. It could also be trading below $5.00 again in the next few weeks.
At the end of the day, a safer strategy is investing in stocks with a bright future and not the opposite.
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