What happened
Shares of SmileDirectClub (SDC +0.00%) rocketed some 11.2% on Thursday, even as the broader markets were up less than 1%.
SmileDirect has become a highly controversial stock with a relatively high short interest. As of Aug. 15, more than 20% of its shares were sold short, as short sellers appear to think the indebted company is in for rough waters in the year ahead.
However, when there is incremental good news, highly shorted stocks can rally as shorts rush to cover. It appears that's what's happening today.
OTC: SDC
Key Data Points
So what
SmileDirect's business has been hurt by high inflation this year. While it fashions its do-it-yourself clear dental aligners as a much cheaper solution than the traditional route of going to an orthodontist, it's still a big-ticket purchase.
Therefore, some encouraging news on the economic front likely spurred some shorts to cover today. Continuing unemployment claims came in lower than expected, gasoline prices are falling, and Fed Chair Jay Powell, in his first interview since his infamous Jackson Hole speech, said he believes the Fed will get inflation under control without the severe social costs of the early 1980s.
When a company has this high of a short interest, it doesn't take much for a big move to occur. Meanwhile, SmileDirectClub also made some incrementally positive announcements this week. It joined the Dental Trade Alliance yesterday, becoming the first clear aligner company to become a member of this trade association, which includes suppliers to the dental industry.
It may not seem like a big deal, but since SmileDirectClub has had to fight legal battles against several state dental boards over its business model over the past few years, more acceptance as part of the mainstream dental industry seems like a positive.
Perhaps more importantly, SDC also announced the completion of its new retainer manufacturing technology at its plant in Tennessee earlier this week. Management claims this will increase productivity by 225%, increasing output with much lower labor costs. That's a big deal given labor cost pressures, and the fact that SmileDirectClub desperately needs to enhance its profitability.
Now what
SmileDirectClub could very well run into liquidity problems next year, given that it continues to lose money, while only having $158 million in cash against roughly $790 million in debt. This is why shorts appear to be pouncing on the stock.
However, management believes it can turn things around, as its new manufacturing technology lowers costs. In addition, the company will unveil its new smartphone app to the public later this year or next year, which could greatly lower customer acquisition costs.
If the plan works and the economy improves, bringing demand back, SmileDirect's stock could take off higher in a big way. However, that type of upside comes with an elevated risk of bankruptcy, so it remains a high-risk, high-upside play only appropriate for investors willing to lose all of their capital on this particular stock.
