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The Fairway Group Holdings Corp (FWM) Long Swing Trade Thesis – Earnings Play/Short Cover

 

The Fairway Group Holdings Corp (NASDAQ:FWM) is set to report earnings after the bell on May 26th, 2015. Immediately before the last earnings report, the stock made a nice run up and continued to run to over $7, before being re shorted down to its current level of about $4.90. The last earnings were reported on Feb. 5th, 2015, after the bell. Let’s take a look at the price action.

Feb 5, 2015 5.10 5.37 4.90 5.06 710,700 5.06
Feb 4, 2015 4.90 5.25 4.79 5.02 510,900 5.02
Feb 3, 2015 5.10 5.35 4.76 4.91 937,500 4.91
Feb 2, 2015 4.59 5.16 4.46 5.09 902,800 5.09
Jan 30, 2015 4.34 4.86 4.31 4.56 764,800 4.56
Jan 29, 2015 4.28 4.40 4.11 4.35 338,800 4.35
Jan 28, 2015 4.40 4.44 4.18 4.24 297,600 4.24
Jan 27, 2015 4.21 4.42 4.20 4.36 342,500 4.36
Jan 26, 2015 4.36 4.45 4.17 4.27 399,800 4.27

 

We can see from above, the stock made a nice run from its low of $4.11 up to $5.37 which was the day of the earnings after the bell.Now, the short interest is just as high, if not higher coming in at 17.5%. With Fairway’s new management making progress with the bottom line, I would expect many shorts to cover as to minimize their risk of a stronger bottom line and a short squeeze where they can lose out on the strong profit they already have (52 week high recently of over $7).

Shares Short (as of Apr 15, 2015)3: 3.54M
Short Ratio (as of Apr 15, 2015)3: 7.10
Short % of Float (as of Apr 15, 2015)3: 17.40%

Again, from above we can see 17.5% of the float held short, that I would absolutely expect many of those shorts to cover before earnings on the 26th. As I do believe EPS will beat as management has taken some cost cutting measures along with some new strategies.

My sources on this tell me that Whole Foods is not likely to acquire Fairway, and that Kroger is the favorite to do so, but not any time soon — more likely at the end of this year or Q1, 2016.

Kroger is a giant, and can absorb Fairway’s debt and write it off along with the company’s large accumulated deficit over time. I have heard that Fairway is actively shopping the company.

Let’s take a look at the chart;

newfwmH

I marked in white, “HS” which means, “Head and Shoulders.” We can see the HS did confirm after the stock broke down under the neckline somewhere around $5.30. The stock then hit a low on May 5th of $4.34, which is more than the expected 10% correction off of an HS pattern. We can now see the stock is making higher lows after bouncing back to $5.19, which was a bit much a bounce back.

Now, we see the yellow lined MACD crossing into positive territory along with the money flow increasing and RSI increasing as well. The volume trend shows me that the stock is just about done with consolidation and is ready to pop up to a new higher level.

For the reasons I mention in this write up, I am expecting a price of at least $5.65 into earnings, and possibly it might touch $6. Therefore, I am trading this one as a long short term swing trade and as an earnings run-up/short cover play. I just cannot imagine the shorts willing to gamble with their profits from over $7 and potentially looking at a massive short squeeze if Fairway beats on EPS in its earnings report this Tuesday as I think they will — the current chart seems to indicate this to me.