Bombardier Inc.: There Could Be a Big Short Squeeze in the Near Future

Investors are betting heavily against Bombardier Inc. (TSX:BBD.B). They may be forced to reverse those bets.

| More on:
The Motley Fool

To put it mildly, Bombardier Inc. (TSX:BBD.B) has its fair share of detractors in the investment community. And that was confirmed on October 5 when TMX Group Limited released its latest data on short positions for TSX-listed companies.

According to the numbers, investors have stepped up their bearish bets on Bombardier. All in all, 60 million of the company’s shares are sold short, an increase of nearly 30% in just two weeks.

It’s easy to see why investors lack confidence. Bombardier continues to burn through cash and may run out of liquidity some time next year. Making matters worse, the CSeries hasn’t secured any firm orders for over 12 months. And the founding family is determined to retain voting control, even though the company has been mismanaged for years.

But with so many investors betting against the company, this may have actually created a golden opportunity.

Short selling

For those of you unfamiliar with a short sale, it starts with an investor borrowing a company’s shares, then selling those shares immediately. The investor then buys back the shares at a later date in order to cover the initial loan. So, if the shares decrease in value, the investor profits, and vice versa.

Short selling can be very profitable if done well, but it comes with one major problem: unlimited downside. Remember, if you buy a stock, the share price can’t go below zero. You can only lose what you put in. But there’s no upper limit on a stock price.

For that reason, when short sellers suffer losses, they are often forced to reverse their bets. This can increase a stock’s demand after its price rises, causing the stock price to increase more, and so the cycle continues. If other investors realize what’s going on, then they will jump on board too, which strengthens this cycle even further. This is known as a “short squeeze” and can cause stock prices to soar in a very short time.

What makes Bombardier a candidate for a short squeeze?

Whenever there are a lot of a company’s shares sold short, there is potential for a short squeeze.

Short squeezes also tend to occur for companies that are thinly traded. After all, short sellers have more difficulty covering their positions on stocks that don’t trade that often. And Bombardier’s shares are more thinly traded than they initially appear; on days when there’s no significant news, it’s common for less than five million shares to trade hands.

If you need any more proof, look at what happened on October 6. Reports surfaced that Bombardier had discussed selling a majority stake in its CSeries to Airbus, but nothing happened. Yet the stock price still jumped 15% in response.

And a CSeries sale, or a sale of Bombardier Transportation, could still happen. If it does, then we could see a big short squeeze, and you’ll want to be holding the shares along the way.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Benjamin Sinclair has no position in any stocks mentioned.

More on Investing

A worker drinks out of a mug in an office.
Dividend Stocks

A Dividend Giant I’d Buy Over BCE Stock Right Now

The largest telecom company in Canada is brutally discounted, and the dividend yield is naturally up, but it's too risky…

Read more »

a man celebrates his good fortune with a disco ball and confetti
Dividend Stocks

Get Ready to Invest $7,000 in This Dividend Stock for New Year Passive Income

This is the year you get ahead, and maxing out your TFSA contribution is the best way to start.

Read more »

ways to boost income
Dividend Stocks

Buy 2,653 Shares of This Top Dividend Stock for $10K in Annual Passive Income

Enbridge is a blue-chip TSX dividend stock that offers shareholders a forward yield of 6%. Is it still a good…

Read more »

tsx today
Stock Market

TSX Today: What to Watch for in Stocks on Friday, December 13

Down 1.1% week to date, the TSX Composite Index seems on track to end its five-week winning streak.

Read more »

ETF stands for Exchange Traded Fund
Bank Stocks

A Canadian Bank ETF I’d Buy With $1,000 and Hold Forever

This unique Hamilton ETF gives you 1.25x leveraged exposure to Canada's Big Six bank stocks.

Read more »

a person looks out a window into a cityscape
Dividend Stocks

1 Marvellous Canadian Dividend Stock Down 11% to Buy and Hold Immediately

Buying up this dividend stock while it's down isn't just a smart move, it could make you even more passive…

Read more »

Blocks conceptualizing the Registered Retirement Savings Plan
Dividend Stocks

CPP at 70: Is it Enough if Invested in an RRSP?

Even if you wait to take out CPP at 70, it's simply not going to cut it during retirement. Which…

Read more »

A shopper makes purchases from an online store.
Tech Stocks

The Smartest Growth Stock to Buy With $1,000 Right Now

Given its solid sales growth, improved profitability, and healthy growth prospects, Shopify would be an excellent buy.

Read more »