Saturday, May 31, 2014

Joy Global: Primed for a Short Squeeze

It’s not quite love, but at least JPMorgan is considering the potential upside in Joy Global (JOY), one of the market’s least love stocks, next week when it releases earnings.

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JPMorgan’s Ann Duignan and team wonder if Joy Global’s earnings will take its cues from Cliffs Natural Resources (CLF) or Caterpillar (CAT), but decides that either way Joy Global could be poised for a short squeeze. They explain:

Expectations are mixed going into the quarter, as commentary from mining companies remains negative (earlier this week, Cliffs Natural Resources reduced its capex budget by $100MM, or ~25%), but Caterpillar’s reported dealer retail sales for the Resource segment in NA appear to be stabilizing (down 3% in JOY’s FQ2 vs. down 26% in FQ1)…JOY remains one of the most-heavily-shorted names in our coverage universe, and any positive news (particularly in the aftermarket business) could present upside risk in the form of a "short squeeze." While we remain Neutral on the back of a challenging outlook for mining equipment demand, our Equity Derivatives Strategy team recommends investors capitalize on upside risk to the earnings report through options.

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Shares of Joy Global have fallen 1.7% to $57.20 at 1:51 p.m. today, while Caterpillar has dropped 1.8% to $101.71 and Cliffs Natural Resources has declined 4.7% to $15.82, as its battle with Casablanca Capital heats up.

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