This is why De La Rue rose 177% in two days (DLAR)

By Richard Mason

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A stunning reversal in the De La Rue (LSE:DLAR) share price has market commentators scratching their heads and wondering if a V-shaped recovery is now in play.

The De La Rue share price was languishing in the doldrums at 40.75p on Friday 29 May, down 72% from pre-crash highs. Come the next trading day on Monday 1 June and the share price shot up as high as 154.1p, closing at 120p.

On Tuesday 2 June DLAR shares opened at 125.6p and as of 10am sit at 180.9p.

For any brave contrarian investor, that’s a four-bag in 48 hours.

De La Rue manufactures passports and banknotes, and one of the main themes we’ve been hearing about this pandemic crisis is that it has accelerated the end of cash.

With the shops that remained open specifically asking patrons to use contactless cards, surely there was no business left in De La Rue? It seemed an obvious short.

Short squeeze on results

But results that hit the mat on 1 June terrified short-sellers. De La Rue hailed a “strong” start to the year, with “limited impact” from the coronavirus as it left full-year expectations unchanged.

A short squeeze is an extremely fast increase in the price of a stock. It happens in heavily shorted stocks when short sellers close their positions, driving prices higher. There’s an excess of demand by shorters because they are forced to buy at the higher price, and a lack of supply. This cascade effect pushes the price ever higher.

In the long term shorters may be correct, and De La Rue’s business model could be finished. But the market has effectively changed its mind overnight.

The company spotlighted a series of contract wins totalling more than £100 million for its authentication division. These include a five-year deal with the Australian government to supply polycarbonate data pages for the country’s passports.

De La Rue added that its currency division had also seen “strong demand” with contract wins totalling 80% of its full-year printing capacity.

More short squeezes could be on the cards as we head further into earnings season. Bears beware.

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Author: Richard Mason

This article does not provide any financial advice and is not a recommendation to deal in any securities or product. Investments may fall in value and an investor may lose some or all of their investment. Past performance is not an indicator of future performance.

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