Markets

Why Houghton Mifflin Harcourt Stock Skyrocketed on Thursday

What happened

Learning company Houghton Mifflin Harcourt (NASDAQ: HMHC) gave investors a rocketry lesson on Thursday, as the stock soared 32% for the day. At one point, it was up a whopping 60%. The company launched a new online tool for teachers, an obviously relevant product in the era of COVID-19.

While it did report news today, I suspect there's more to today's move than meets the eye. The stock is exactly the type that momentum traders find attractive.

A man in a suit rides a rocketship expelling cash exhaust over a multi-colored bar chart.

Image source: Getty Images.

So what

The company is launching a product called Teacher's Corner. This online experience will provide educators tools to improve their skills. It includes video series from other teachers, live coaching events, and a place for educators to connect with one another.

Summer vacation is almost over, yet the plan for education in the fall is still up in the air. Major school districts, including Los Angeles and New York City, have already altered their back-to-school plans. And if the COVID-19 pandemic spreads too far, schools around the country may be forced into online education. Other online education companies like Chegg and K12 have noted increased demand as a result.

Teachers might feel unprepared for this sort of thing, so it's easy to see how Teacher's Corner is a timely offering. But financial details weren't provided in the press release. What's a platform like Teacher's Corner worth? Investors today said it's worth over $70 million in market capitalization. That's a lot. 

Looking closer, Houghton Mifflin Harcourt is a small-cap stock trading far below $5 per share. These are the kind of stocks momentum traders love. They're easy to manipulate to make a quick buck, and traders quickly pile in on an elevator-pitch thesis.

Now what

I don't wish to imply Houghton Mifflin Harcourt is a bad company. Rather, investors would do well to get acquainted with any online education company, since it looks like online teaching will become more normal. And this could actually be a good value stock. Consider its free cash flow was $115 million in 2019, compared with its enterprise value of $920 million. 

However, when a stock pops this much on news like this, I assume many of the buyers don't intend to hold their shares long term. Therefore, don't be surprised to see Houghton Mifflin Harcourt stock pull back, at least in the short term, as today's news gets stale. 

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Jon Quast has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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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