Why Fossil's Huge Move Might Not Last Too Long

Fossil Group Inc FOSL shares soared higher by more than 60 percent Wednesday after the company shocked Wall Street and short sellers with better-than-feared fourth-quarter earnings and 2018 guidance. But while Fossil shareholders have a rare reason to celebrate, the huge move may not last for long.

"We would still contend that the fundamental story here remains extremely challenged," Wells Fargo analyst Ike Boruchow said.

Fossil shares are likely experiencing a massive short squeeze driven by the stock's extremely high short percent of float of 42 percent prior to its earnings report. Buckingham Research Group analyst Scott Krasik said Fossil is experiencing a classic short squeeze thanks to the massive outstanding short position in the stock.

Massive Squeeze

“We believe the stock reaction is more based on a technical short squeeze where 42 percent of the float was short rather than a fundamental improvement in FOSL's business prospects,” Krasik said in a note.

According to Yahoo Finance, Fossil has roughly 17.8 million shares held short, up from 14.7 million one month ago. YCharts indicates Fossil's net short interest has more than doubled in the past year, surging 114.2 percent.

Total short interest in Fossil's stock stands at around $177 million and is up another 25 percent year-to-date, according to financial analytics firm S3 Partners

Related Link: Is Fossil's 80% Surge Justified? KeyBanc Says It's Just The Beginning

"Shorts are down $106 million on today's 60 percent price move, increasing their year-to-date mark-to-market loss to $131 million, down 74 percent on the year," S3 analyst Ihor Dusaniwsky tells Benzinga.

Dusaniwsky, however, says investors should remember to distinguish between large changes in short volume, which typically represent institutional buying and selling, and stocks with large short percentages of float, which are usually dominated by retail traders.

"Any stock with less than a few hundred million in short interest is usually irrelevant to the Street in general," Dusaniwsky said.

Buckingham's Krasik reiterated his Underperform rating for Fossil and raised his price target from $5 to $8.

Despite the 60 percent jump, Fossil shares remain down 36 percent over the past year. The stock hit an intra-day high of $16.50 and traded around $14.48 at time of publication.