Markets

Here's Why Diplomat Pharmacy Jumped Higher Today

What happened

Shares of Diplomat Pharmacy (NYSE: DPLO) are up 10.5% at 12:34 p.m. EST on no apparent news as investors continue to digest the value of a company with an uncertain future.

So what

Earlier this month, Diplomat Pharmacy said it lost a big account and was in danger of being foreclosed on by its creditors. A few days later, we saw some volatility with the stock bouncing back, which apparently is continuing today.

Amazingly, shares have recovered more than half of the value they lost on the one-day 50% drop after the company warned about the possibility of a bankruptcy. Apparently investors are feeling a little more confident that management will be able to renegotiate the covenants that are part of its credit agreements to avoid foreclosure. The company is also looking to sell all or some of its assets, so investors may also have higher confidence that Diplomat Pharmacy can find a buyer.

The move could also be fueled by a short squeeze in which short-sellers buy shares to cover their short positions, which temporarily increases the number of buyers and drives up the price. It can be a vicious cycle, because as the share price increases, the positions of more short-sellers become underwater, prompting them to cover their positions.

Hands taking medication from a pharmacy shelf.

Image source: Getty Images.

Now what

Short squeezes tend to be fairly short-lived. As the number of people interested in buying and selling comes back into equilibrium, the share price often retreats, which might already have happened with shares off the high of the day.

Diplomat Pharmacy might be a value stock, but with no news about how management is progressing in its negotiations with creditors and potential buyers, it's difficult to say for sure. Investors should expect continued volatility until management releases additional information.

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Brian Orelli has no position in any of the stocks mentioned. The Motley Fool recommends Diplomat Pharmacy. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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