TLDR: YELLQ will squeeze.
Long post:
I believe that we will witness the biggest short squeeze of the year on YELLQ. Here's why:
1. THE CONNECTIONS
1.1 The Boston, Massachusetts connection
MFN Partners, a Boston hedge fund with over 3 Billion in AUM, accumulated a 42.5 % stake in YELL at the end of July, 2023, at an average of about $1 a share, just before Yellow announced filing for Chapter 11 Bankruptcy.
MFN Partners is the largest shareholder in a company called XPO. Like YELLOW, XPO is an American company that conducts less-than-truckload shipping in North America with 564 locations. 25% of their portfolio is in XPO.
There are 2 potential reasons that a hedge fund would risk $20 million dollars on a bankrupt company:
Given their expertise in the assessing companies in less-than-truckload shipping industry, they ran the numbers and are certain that the assets will easily surpass liabilities and there will be positive equity in a Chapter 11 liquidation.
They have insider information that XPO will bid for Yellow's assets for a significantly higher price than their book value.
1.2 The Washington, D.C connection
During the COVID-19 pandemic, the U.S. Treasury Department provided a 700 million loan to Yellow Corporation under the CARES Act. In exchange for the loan, the U.S. government received a 30% stake in Yellow. Specifically, the Treasury received warrants to purchase approximately 29.6% of the common stock of YRC Worldwide at a price of $2.05 per share.
These 2 connections are key to the short squeeze setup. Large shareholders(10%+ stake of outstanding shares) and insiders are subject to certain restrictions(Short-Swing Profit Rule, Lock-Up Agreements) when it comes to selling their shares when a company is undergoing Chapter 11 bankruptcy proceedings. I believe this is the reason why we saw some insider executives sell a portion of their shares just before the ticker got moved to the OTC market. They probably had a lock-up period during the bankruptcy period, and they only sold a small amount of their total shares as the lock-up period can be over 6 months.
MFN Partners filed an 13D/A on August 22 that confirms that they haven’t sold a single share on the run up to $5. They held their full position of 22,067,795 shares. Not only that, but they offered Yellow a much better DIP financing deal to get through the Bankruptcy procedure than the current one they had with Apollo Capital Management. MFN joined forces with Citadel to offer Yellow the DIP loan on much better terms(more time to sell assets, lower interest), giving them the flexibility they need to extract the most from their assets.
2. THE FLOAT
Combined, MFN Partners and the US Treasury have 72% of the shares outstanding locked up. Depending on other holdings of insider and smaller institution positions, the actual public float could be even smaller.
I found different stats of the public float on certain reporting websites, with the largest being at 26% and the smallest at 15%. The point is, most of the shares are locked up and legally can’t be traded.
The small public float makes the stock extremely volatile and easy to move on low volume, but is one of the key components during a squeeze.
To give you some perspective on how volatile and how easy it is to move the stock, on August 01,2023 the stock went from $1.25 in the premarket to $5 during trading hours.
On August 8th, at 3:38 PM, FOX News reporter Charles Gasparino tweeted that sales will likely surpass the $1.4B in secured debt and stockholders will get paid. Within seconds of him tweeting that, the stock ran from $2.10 to $3.32 within 100 seconds with no volatility halt. I’ve seen dozens of stocks get a LUDP – Volatility Halt on only a 10% rise, but YELL can move up 60% with no halts due to the low float.
3. THE WAR
We are very early into bankruptcy, and an aggressive bidding war already started for Yellow's valuable terminal network. More than 100 interested parties signed up.
Estes Express started off the party with $1.3 Billion for Yellow Real-Estate Sale and Old Dominion Freight Line placed a bid for $1.5 Billion a few days later. Given that they have 180 days to sell their assets, we can expect higher bids for the valuable real estate portfolio.
3.1 “Wait, those terminals are worth HOW MUCH ?”
Those terminals are so valuable mainly because Yellow was founded in 1929, before many of the zoning laws were introduced. Terminals built before the enactment of current zoning laws are often “grandfathered” in. This means that even if the current zoning for the area no longer permits such facilities, the existing ones can continue operating due to their prior establishment. If a terminal built before current zoning restrictions is located in a now densely populated urban area, the location advantage can be irreplaceable. Over the decades, as cities expanded, many areas that were once on the outskirts are now central. Such centrally located terminals can offer faster access to more customers.
This is by far their most valuable asset, and they’re selling the whole portfolio to the highest bidder. Any current calculation of assets/ liabilities is inherently wrong because those terminals are listed at their historical cost on their balance sheet, not fair market value.
To give you an example of the discrepancy between the cost value and the market value of those terminals, Yellow sold a single terminal in Compton, California, for $80 million. The cost value of that terminal was only $3 million.
The company said in its most recent annual report that it owns 166 properties and leases another 142 facilities.
3.2 Truckload of Tractors and Trailers
Yellow has 12,700 tractors: 11,700 owned / 1,000 leased and 42000 Trailers,from which 34,800 owned and 7,200 leased.
Based on numbers found on https://www.penskeusedtrucks.com and ratings.freighwaves.com, some rough estimates would be $50,000 per tractor and $14,000 per trailer. That’s an additional $1,072 Billion in assets on top of the 1.5 Billion floor on the terminals.
3.3 Fight against the Teamsters
Yellow is suing the Teamsters union for 1.637 Billion for the loss in enterprise value Yellow is sustaining as a result of the Union’s breaches. That is 16 times the current market cap of YELLQ. Let’s say that they sell the assets for just enough cash to cover the liabilities, and they win this lawsuit, that’s a 16 bagger payday.
4. The short interest
According to marketbeat.com, there are currently 9 million shares sold short. Based on our previous calculations, there are only between 7.8 and 13.7 million shares available to the public.
Which means, the actual short interest in relation to the public float is somewhere between 65% to 115%.
Given the very high borrow fee (180%), and the lengthy bankruptcy procedure, I believe we will see a massive wave of short covering soon, even without a positive catalyst. The likelihood of a negative catalyst in the near term is very unlikely, as the bankruptcy procedures, litigation and liquidating assets can take several months.
Assuming the bankruptcy process takes about 6 months, Short sellers would have to pay 90% in fees if they want to hold their short position. Given the timeline of the asset auctions and legal battles, there might be no positive or negative catalyst until October or November.
So I believe we will see a rally even without a catalyst, and a violent squeeze on any positive Catalyst.
Nothing written in this post is financial advice. I am not a financial advisor. Invest based on your own Due Diligence and risk tolerance.
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