Why Endo International plc Rocketed Higher Today

What happened

Endo International (NASDAQ: ENDP) closed up 19% today on no apparent news. With shares bottoming out over the last month -- and down about 60% over the last year or so -- investors seem to have decided that this is the bottom.

At least for now.

So what

It's possible that some leaked information caused the large jump in the stock price today, but a more likely scenario is a short squeeze as short sellers buy to cover their positions. It's a vicious cycle where a small jump in the stock price can turn into a large move as more and more short sellers decide to close their positions, generating more potential buyers than sellers.

As of May 15 -- the last date with data from Nasdaq -- there were 33 million shares sold short, up from 32.2 million 15 days earlier. The number of shares sold short could have increased even more since then; it topped out recently at 36.2 million at the end of March.

Now what

Endo's long-term investors should enjoy the ride today, but realize that jumps from short squeezes don't typically hold once the balance of buyers and sellers comes back into equilibrium.

Rather than relishing the daily movement, investors should be focused on whether Endo can hit its 2018 revenue goal of $2.6 billion and $2.8 billion, and where the bottom line will fall in the rather wide adjusted earnings guidance of $2.15 to $2.55. At the high end, Endo is trading at a crazy-cheap 3.04 times earnings.

Additional growth beyond this year could come from the acquisition of Somerset Therapeutics, which was announced in April. Somerset has a pipeline of 40 products, with more than half of them already under review at the Food and Drug Administration.

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Brian Orelli and The Motley Fool have no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.