I think many investors are looking at two numbers in particular: medical property trust (MPW -2.23%)One is 67%. That’s how far Medical Properties Trust’s stock has fallen from its previous highs. Another figure is 14.7%. That’s the company’s current dividend yield.
But these aren’t the only numbers worth noting. Here’s another figure for Medical Properties Trust investors to watch like a hawk.
As of 28 February 2023, nearly 26.2% of the Medical Properties Trust’s free float has been sold short. Free float represents the number of shares that retail investors can trade. Issued shares owned by insiders or restricted from sale are excluded.
Why is it so important to monitor this small percentage of float? Mainly because it set us up for a short squeeze. In Short Squeeze, short sellers scramble to cover their positions. This causes the stock price to rise rapidly, and the rise encourages more short sellers to buy the stock to eliminate risk.
The Medical Property Trust’s Short Percentage of Free Float and a similar measure, Short Percentage of Shares Outstanding, are now at all-time highs. This percentage is well above the levels before or during the 2008 and 2009 market crashes.
The big question now is what short sellers have been doing since the end of last month. The answer to that question is readily available. New short sales figures will be released on March 24, 2023. If the Medical Properties Trust’s percentage of short sales is significantly lower than it was late last month, that’s a sign. Some short sellers believe the worst is over for the company. If not, that means short sellers are still betting that the stock will continue to fall after early 2022, even after losing two-thirds of the stock.
As revealed later this week, the higher the Medical Properties Trust’s float short percentage, the more likely it is that there will be a short squeeze along the way. Of course, short squeezes require a catalyst. What inspired a healthcare real estate investment trust (REIT)?
One possible candidate is the encouraging news that top tenants are making progress in deferred rent payments. Steven Hamner, his CFO of Medical Properties Trust, said on the company’s fourth-quarter conference call that Prospect Medical didn’t pay his rent in full in January or February.
At least there is reason to be cautiously optimistic about this. Prospect is in the process of selling properties in Rhode Island and Connecticut and needs to provide additional cash to hospital operators.
Some short-sellers can also expect Medical Properties Trust to cut its dividend. Confirmation that this does not happen can cause a short squeeze.
REIT stocks tend to rise when interest rates fall. I would rank rate cuts as only a marginal possibility as a catalyst for short-term pressure. But if the economy turns bad (perhaps in the aftermath of the bank turmoil), the Fed could cut interest rates.
Long-term (long-term) answer
I think a short-term squeeze for the Medical Properties Trust could happen at some point in the next few months. However, I cannot say that it is highly likely. Betting on short squeezes is not the best reason to consider buying stocks.
But there are reasons why aggressive investors are intrigued by Medical Properties Trust. The worst may be over for the company. CEO Ed Aldag said in opening comments on the fourth quarter conference call. Investors who buy the stock can secure a particularly juicy dividend yield if the bleeding stops.
In the long term, the Medical Properties Trust should have a big tailwind. As the population ages, the demand for hospital services should increase. REITs may also benefit from a “survival of the fittest” dynamic, where weaker hospital operators are weeded out and stronger ones thrive.
Medical Properties Trust’s short float percentage is a number investors should watch closely right now. But my prediction is that it won’t matter for very long.
Keith Speights holds a position with the Medical Properties Trust. The Motley Fool has no positions in any of the companies mentioned. The Motley Fool’s U.S. headquarters has a disclosure policy.