Multinational telecommunications giant GTT Communications (NYSE: GTT) has seen its share price soar over 110% in the last week. Is there good reason for this or is it yet another short squeeze instigated by Robinhood investors?
Vital service provider
Founded in 2006, GTT was previously known as Global Telcom & Technology.
The company is massive, with an international presence spanning several countries. It provides internet services and cloud networking packages to a global pool of clients.
In addition, it sells private networking options, optical transport, and software-defined wide-area networking. Therefore, it would appear to be a vital cog in the global tech machine powering business.
But that doesn’t necessarily mean it’s got what it takes to survive. Like any business, it needs to manage its money to endure, and the lack of transparency in this regard is worrying.
A volatile share price slide
To think the GTT share price was trading above $60 a share in March 2018 seems incredible. Since then, the global company has seen its market cap plummet to $175m. Today it trades below $3 a share.
Prior to the pandemic hitting in March 2020, the GTT share price was trading around $14. By the end of December, it was around $3.50.
It then enjoyed a brief revival at the height of the GameStop (NYSE: GME) short squeeze in January this year. Followed by bad news and a further slide.
The slide was exacerbated in February as bankruptcy rumours began to fly. The company failed to meet SEC filing requirements or release its financial results on time for three quarters running. This set tongues wagging and investors running for the hills.
Lack of communication
For a communications company, there’s been a serious lack of communication over the past year. In fact, the company hasn’t conducted a shareholder/analyst call since May 27 2020.
In October, GTT announced plans to sell its infrastructure division for $2.1 billion, within six months. The sale includes three transatlantic subsea cables, one of which reportedly includes the lowest latency route between Europe and North America.
The buyer is I Squared Capital (ISQ) a private equity firm focusing on global infrastructure investments. But this is also now in doubt, as a lack of communication keeps shareholders in the dark. It could be that the pandemic is creating challenges in the sale, but no-one seems to know.
The bankruptcy rumours began with the suggestion GTT may opt for a pre-packaged bankruptcy filing to reduce its debt.
Of course, if GTT does declare Chapter 11 bankruptcy protection then ISQ could swoop in and snap up the coveted infrastructure assets at a much lower price.
In its most recent SEC 8-K filing, the company said it does not expect to be able to file all the necessary documents by the latest expiration date. But it’s working on filing the Restated Financial Statements, as soon as possible.
If the Company doesn’t file the necessary paperwork by August 17, it may risk being delisted from the New York Stock Exchange (NYSE).
There are many risks and uncertainties surrounding this stock therefore it’s a highly risky investment.
As of March 30, Hedge Fund Spruce House Investment Management is the firm’s biggest shareholder with 27% ownership. BlackRock (NYSE: BLK), Vanguard and Goldman Sachs (NYSE: GS) are also invested.
However, short positions in the stock have grown in recent weeks. According to Capital IQ and ZeroHedge, 36.9% of the available float (shares available to the public) has been shorted.
In addition, the volume on derivatives such as call and put options had risen fivefold. With 21,078 option contracts outstanding on Friday. This included call options at 69% volume and put options at 31% volume.
When short interest is high it encourages amateur day traders to swoop in as a group, using their collective power to boost the share price. This appears like that’s what may have happened to GTT Communications stock last week.
However, some argue it has staying power. The company is huge, with considerable assets that are considered valuable. It also has many companies reliant on GTT connectivity.
A comparison being made, is that telecommunications company Sprint saw its share price plummet to around $2 in 2016. It then recovered to over $7 by 2019 and was finally merged with T-mobile (NASDAQ: TMUS) last year.
Patient shareholders received T-mobile shares, which have soared in the past year. So, some GTT investors may be hoping for a similar scenario to take place. Nevertheless, this is still risky, because the GTT share price could fall further.
Dead Cat Bounce
The share price rising over 110% last week may have boosted the coffers of a few lucky traders but it’s unlikely to be anything more than a dead cat bounce.
Until the company comes clean and lets investors see exactly what’s going on, alarm bells continue to ring. Therefore, there’s no compelling reason to feel optimistic about its future on the information available to investors today.