Exela Technologies (NASDAQ:XELA) is a Texas company that sells itself as a leader in business process automation. The XELA stock price is down 8.6% in the last six months.
The current company is the result of a 2017 tie-up of three companies which now suffers from crushing debts. Exela is still around thanks to investors who let it issue new shares to pay down those debts. Yet, it’s hard to see Exela clearing over $1.5 billion of long-term debt when the market cap is $157 million.
But they’re going to try.
The logical reaction to seeing the books would be to expect bankruptcy, writing down the debts and zeroing-out stockholders. The logical move would be to sell XELA short.
But logic has nothing to do with the current market.
Looking for the XELA Stock Squeeze
That’s because one of the Redditors’ favorite games is to look for companies that should be going under and squeeze short sellers by buying stock. On Reddit, no one can tell you’re not a hedge fund. If enough of you get together, you are one.
XELA stock has a lot of shorts. Near the end of July about 8.7 million of its 59 million shares outstanding were being held short. This represented 37% of the 23 million shares that usually trade.
Redditors saw this in July and squeezed hard. In mid-July the stock traded as high as $4.34 a share. After that, while the shorts remained, the squeezers lost interest. XELA opened for trade Aug. 16 at $2.69 a share.
On Aug. 13 XELA stock was added to the NASDAQ “shorthalts” list. This is based on a 10-year old “alternative uptick rule” that acts as a circuit breaker in volatile trade. In practical terms, it limits the price at which a stock may be sold short. It was triggered as XELA plunged 30 cents. Doesn’t sound like much but it’s a move of over 10%.
Some Redditors cried foul. But some Redditors are fools who don’t know that markets have rules for reasons. Those reasons are to assure liquidity and reduce manipulation. By ganging up on a stock, whether you’re long or short, you’re trying to manipulate the market. When we’re talking about a market cap of $157 million, that’s easy to do. Authorities take notice.
Keeping Hope Alive
Exela management hopes that if it keeps dancing and pushing out new stock, it can survive.
The Aug. 10 earnings release for the quarter ending in June won’t help. It showed a net loss of $20 million, 33 cents per share, on revenue of $293 million.
Exela said it has cut its debt by $140 million so far this year. It maintained its yearly guidance, with revenue between $1.25 billion-$1.39 billion and gross profit margins of 23%-25%. Management said that so far in 2021 it has sold $233.9 million in new stock through three equity offerings.
CEO Rob Cogburn and his team are doing all they can. But at the current rate it will still take several years of stock sales to get debt to a reasonable level.
The Bottom Line
The fundamentals of Exela Technologies tell me to stay away.
If you’re buying, it’s for the short squeeze or momentum. A third InvestorPlace contributor, David Moadel says use of Exela’s digital signature platform, called DrySign, is rising. Same with its Digital Mailroom, which scans paper mail so it’s usable as digital files.
The bottom line, however, is clear. Management will use any sign of momentum to sell more stock and retire more debt. The people who are being squeezed here are those who are long Exela.
On Penny Stocks and Low-Volume Stocks: With only the rarest exceptions, InvestorPlace does not publish commentary about companies that have a market cap of less than $100 million or trade less than 100,000 shares each day. That’s because these “penny stocks” are frequently the playground for scam artists and market manipulators. If we ever do publish commentary on a low-volume stock that may be affected by our commentary, we demand that InvestorPlace.com’s writers disclose this fact and warn readers of the risks.
On the date of publication, Dana Blankenhorn held no positions in companies mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of Living With Moore’s Law: Past, Present and Future available at the Amazon Kindle store. Write him at firstname.lastname@example.org or tweet him at @danablankenhorn. He writes a Substack newsletter, Facing the Future, which covers technology, markets, and politics.