Wall Street might be buzzing about the Smurfit Kappa and WestRock merger, but a quiet revolution is brewing within DS Smith, one that even seasoned analysts seem to have overlooked. Nestled within the seemingly mundane details of their latest earnings call lies a potent clue: the company's strategic shift from "bigger to better" could be laying the groundwork for a powerful short squeeze, catapulting DS Smith to unexpected heights.

DS Smith, a global packaging giant specializing in sustainable, fiber-based solutions, is embarking on a bold strategy: maximizing returns from their existing European footprint through relentless organic growth and efficiency improvements. This departure from their previous acquisition-fueled expansion is a testament to the company's confidence in its existing platform and its laser focus on profitability.

What's particularly striking is the sheer scale of DS Smith's internal improvement initiatives. The company has already committed £500 million in discretionary capital expenditure, with a further £300 million planned over the next two years. This £800 million investment will primarily target brownfield projects focused on energy efficiency, labor productivity, and box plant capacity expansions. These projects are not dependent on heroic market recoveries but instead leverage internal efficiencies to deliver impressive returns.

"By the end of this financial year, we'll have deployed £500 million of discretionary capital over a three-year timeframe. This involves a combination of growth-orientated capital, which often takes several years to deploy, and as a result, is coming online in a phased fashion over the next few years, together with efficiency improvement, cost reduction and innovation. Over the next couple of years, we can see attractive opportunities for at least a further £300 million of discretionary capital investment. - Richard Pike, Group Finance Director Designate"

Here's where it gets really interesting. DS Smith projects an incremental £150 million in earnings, spread across FY 2026 and FY 2027, directly attributable to these investments. This translates to a projected 18.75% return on invested capital, a figure that should make any investor sit up and take notice. This internal efficiency drive, combined with the company's impressive track record of delivering on its capital expenditure promises, is creating a powerful recipe for a short squeeze.

But why a short squeeze? As DS Smith doubles down on internal improvements, delivering steady, consistent returns, the market may be slow to recognize the company's true potential. This disconnect between DS Smith's actual performance and market perception could lead to a significant undervaluation of the company, making it a prime target for short sellers.

However, as DS Smith continues to deliver on its ambitious goals, exceeding expectations and demonstrating the potency of its new strategy, short sellers could be caught off guard. The ensuing rush to cover their positions, fueled by a surge in investor confidence and a reassessment of DS Smith's true value, could trigger a powerful short squeeze, sending the stock price soaring.

Projected Earnings Increase from Internal Investments

The following chart illustrates DS Smith's projected incremental earnings from its £800 million investment in internal efficiency and capacity expansion projects. The earnings are phased based on the projected completion and ramp-up of these projects.

Here's a hypothetical scenario. Let's assume that in FY 2026, DS Smith delivers half of its projected £150 million in incremental earnings, bringing in an additional £75 million. Given the current P/E ratio of around 11, this translates to a potential increase in market capitalization of roughly £825 million. This, combined with a short interest exceeding 10% of the float (a figure not unheard of in undervalued companies), could create the perfect storm for a significant short squeeze.

Of course, this is just a hypothetical scenario, and market dynamics are notoriously unpredictable. However, the fundamental strength of DS Smith's new strategy, its commitment to internal efficiencies and profitable growth, and the potential for market undervaluation all point to a compelling case for a short squeeze.

While the Smurfit Kappa and WestRock merger might be grabbing headlines, savvy investors might want to turn their attention to the quiet revolution brewing within DS Smith. This hidden gem, fueled by its "bigger to better" strategy, could be the next big short squeeze target, offering astute investors a chance to ride a wave of unexpected growth and profitability.

"Fun Fact: Did you know that DS Smith once created a life-sized replica of a Formula 1 car entirely out of cardboard? This incredible feat, showcasing the versatility and strength of their materials, is a testament to the company's innovative spirit and its commitment to pushing the boundaries of sustainable packaging."