Shares in hearing device manufacturer Cochlear Limited (ASX: COH) are up 3.4% today to $61.90 at the time of writing. The ostensible reason for the rise is that the company announced it would launch the Cochlear Nucleus Profile Series across Europe in June.
While there is nothing groundbreaking in this announcement (it was expected), it has given the share price some much needed impetus. I suggested in April that Cochlear might be the beneficiary of what is called a short squeeze. A short squeeze occurs when a heavily shorted company announces some good news. As a result, short sellers all rush to cover or reduce their positions at the same time, sending the share price higher, which in turn triggers "stop losses" causing more short sellers to cover, pushing the price higher still.
In order to predict whether there is the potential for a short squeeze, we'll need to look at the average turnover. In the last five months, an average of 207,500 Cochlear shares have been traded each day. That is a measly 0.36% of the total number of shares.
At 26 May, over 17% of Cochlear was still sold short.
If we assume that volume will be somewhat higher and that short sellers are going to buy most of the shares on offer, then it will take at least two months for short sellers to cover their positions. All that is now required is for a couple of big funds to get involved and push up the price of Cochlear shares.
Cochlear is short sold because it is losing market share to its Swiss rival Sonova, and its dividend is unsustainable at a hefty 4.1%. However, the flip side of the argument is that Cochlear's new platform for hearing implants, to which today's announcement refers, could stop the company losing any more market share. Furthermore, it was just last month that the Cochlear CEO told The Australian that the company, "was well placed to take advantage of the forecast increase in public health investment flagged by the Chinese government." For quite some time, I've been suggesting readers buy Cochlear shares while the company is out of favour, because the ageing population is a tailwind so strong as to have the potential to overcome competitive pressures.
