In 2021, a trader with a large Reddit following induced a massive rally in shares of GameStop Corp. NYSE: GME. The downtrodden gaming retailer was the most shorted stock in the entire market in January 2021, but the retail buying frenzy triggered a massive run-up in price as hedge funds were forced to cover their short positions to prevent huge losses.
GameStop shares rallied from under $5 to over $80 (split-adjusted) in just under three weeks, igniting sympathy rallies in other heavily shorted stocks like AMC Entertainment Holdings Inc. NYSE: AMC and Blackberry Limited NYSE: BB. Although the rallies were short-lived, those investors who entered and exited the trades quickly booked handsome profits. A short squeeze fits the bill if you’re looking for a short-term investment strategy with a high upside. But these situations occur infrequently and companies with high short interest rarely make suitable long-term investments.
What is a Short Squeeze Stock?
When investors think a certain stock will drop, they might consider shorting it to profit from any decline. To short a stock, you must first borrow it from your broker and immediately sell it at the current market price. If the price drops, you can rebuy shares at a lower price and return them to your broker, profiting from the difference between the short sale and the repurchase prices.
But what happens if the stock you sell short doesn’t decline? You need to eventually return the shares you borrowed to your broker, as borrowing stock involves paying interest and meeting margin requirements. And if the stock price rises quickly, you might be looking at ever-increasing losses. In this scenario, the short seller will rebuy shares to "cover" their position and prevent more significant losses.
This is precisely what happened in shares of GameStop in 2021, as short sellers and bullish investors accumulated shares for different purposes, creating a massive wave of one-way price pressure. Other factors may vary, but short squeeze stocks must have high short interest to create the necessary conditions.
7 Short Squeeze Stocks to Consider
To find short squeeze candidates, you’ll need to understand two concepts: share float and short interest.
Share float refers to the number of shares available for public purchase, while short interest is the total number of shares that have been sold short but not yet repurchased.
A stock with a low number of shares in the float and high short interest could create a buying frenzy if the price rises as short sellers rush to get the available shares. Using this and other criteria, here are seven short squeeze stocks to watch out for:
1. The Children’s Place Inc.
PLCE
Children's Place
$8.07 +0.35 (+4.53%) (As of 07/8/2024 ET)
- 52-Week Range
- $6.58
▼
$38.03 - Price Target
- $14.50
Kids apparel retailer The Children’s Place Inc. NASDAQ: PLCE holds the ignominious distinction of being the most heavily shorted stock on Wall Street, with over 55% of the float sold short as of this writing. The company has faced internal turmoil following the departure of long-time CEO Jane Elfers and a series of earnings misses. The stock is down more than 63% year-to-date.
However, the stock may have found a short-term bottom near the $8 mark, and analysts have reiterated the stock as a Hold with a consensus price target of $14. Insiders have also bought over $46 million worth of stock in the last 12 months, making PLCE an attractive short squeeze candidate (especially with a float of only 12 million shares).
2. Trupanion Inc.
$29.00 +0.32 (+1.12%) (As of 07/8/2024 ET)
- 52-Week Range
- $19.14
▼
$36.66 - Price Target
- $34.40
Formerly known as Vetinsurance International, Trupanion Inc. NASDAQ: TRUP provides insurance services for dogs and cats to pet owners and veterinarians' offices. The company has a $1.2 billion market cap, and nearly 39% of shares are currently sold short.
Despite investors' bearish outlook, analysts are optimistic about the stock. Of the five analysts covering the stock, three have a Buy rating (two have a Hold), and the consensus price target is $32.80, representing an upside of more than 15%. Bank of America recently upped the stock to a Buy with a new price target of $49.
3. Advantage Solutions Inc.
ADV
Advantage Solutions
$3.32 +0.08 (+2.47%) (As of 07/8/2024 ET)
- Price Target
- $3.43
Advantage Solutions Inc. NASDAQ: ADV is a business logistics company offering services to consumer goods manufacturers and retailers. The firm is tiny, with a market cap of less than $1 billion and short interest over 33%. Short sellers have been rewarded in 2024, as the stock has been down 28% in the last three months.
Recently, ADV shares have seen some unusual volume. Over two million shares were traded on June 25, more than double the previous three-month average. Additionally, insider purchases have been increasing and consensus analyst coverage as ADV as a Moderate Buy with a price target 12% higher than the current market price.
4. Sunnova Energy International Inc.
NOVA
Sunnova Energy International
$5.93 +0.30 (+5.33%) (As of 07/8/2024 ET)
- 52-Week Range
- $3.37
▼
$24.56 - Price Target
- $15.73
Solar systems provider Sunnova Energy International Inc. NYSE: NOVA is another short squeeze possibility with a low $700 million market cap and a healthy 34% short interest. Despite losing more than half its value over the last year, NOVA could already be seeing the short squeeze commence as shares are up nearly 30% in the last month. NOVA has plenty of analyst coverage, too, with 16 Buy ratings (out of 25) and a consensus price target 177% above the current market price.
5. Forward Air Corp.
$19.33 +0.54 (+2.87%) (As of 07/8/2024 ET)
- 52-Week Range
- $11.21
▼
$121.38 - P/E Ratio
- 5.65
- Price Target
- $76.86
Another short squeeze scenario could unfold with Forward Air Corp. NASDAQ: FWRD, a freight logistics firm with a small market cap, low 25 million share float and 32% short interest. The consensus rating is Hold, but the stock recently got an upgrade from Wolfe Research, and shares have been up over 50% in the last month. The company’s next earnings report is tentatively scheduled for early August.
6. EVgo Inc.
$2.82 +0.03 (+1.08%) (As of 07/8/2024 ET)
- Price Target
- $4.00
The electric vehicle sector hasn’t been setting the market on fire recently, but EVgo Inc. NYSE: EVGO could be stock to watch for a potential short squeeze. The firm runs a charging station network operating in 34 states and has a $698 million market cap. Short interest sits at 33%.
Of the seven analysts covering the stock, four have a Buy rating and three list a Hold rating. The consensus price target is $4.00, representing more than 73% upside potential. The company has a potential earnings catalyst coming in August as it looks for its seventh consecutive beat.
7. Zynex Inc.
$8.76 -0.16 (-1.79%) (As of 07/8/2024 ET)
- 52-Week Range
- $6.88
▼
$13.77 - P/E Ratio
- 38.09
- Price Target
- $18.00
Medical equipment manufacturer Zynex Inc. NASDAQ: ZYXI makes devices to help chronic and acute pain, and aid in rehabilitation programs. Zynex has only a $277 million market cap and a free share float of 15 million, with 33% short interest. The stock reached an all-time high near $26 in June 2020 but has since plummeted to under $9 per share.
ZYXI shares have intriguing short-squeeze characteristics. In addition to high short interest and a small float, Royal Bank of Canada and HC Wainwright recently reiterated Zynex as a buy with an average price target double the current market price.
How We Decided These 7 Short Squeeze Stocks
Short squeezes are rare, and markets constantly evolve, so you should consider various factors when researching stocks. Short interest is crucial, but it's only one of the essential aspects. Each of the seven stocks in this article met two or three of the following criteria:
- High Short Interest: You can’t have a short squeeze without short sellers rushing to cover their positions, so every stock included in this list has at least 30% of its float sold short.
- Low Float: When highly shorted stocks have low floats, it can become a game of musical chairs where short sellers don’t want to be left without a seat when the music stops. The lower the float, the fewer shares are available for short covering.
- Insider Buying: While insiders buy shares for all kinds of reasons, an uptick in insider buy rates could signal an increasingly bullish outlook for the company.
- Increasing Volume: Unusual volume activity could indicate a short squeeze brewing. If demand for the stock rises, it could mean fewer shares available for short sellers who need to return stock to their brokers.
- Potential Catalyst: A short squeeze is often triggered by a catalyst, such as a blowout earnings report, successful product launch, or clinical trial -- or, as in the case of GameStop, a Reddit trader encouraging his large retail following.
Potential Risks of Short Squeezing
Even if you find a short squeeze, you must know the risks involved. Here are there to consider:
- Mistiming the Trade: Short squeezes are short-lived phenomena that require proper timing. If you wait too long or buy too early, you could miss the rally and negate profits.
- Degrading Company Fundamentals: Investors don’t short companies without good reason. Most heavily shorted companies have some fundamental risk, like high debt levels, constant earnings misses, or executive mismanagement.
- Halts and Regulatory Interventions: Short squeezes are violent and volatile moves, and when stocks move fast and hard, regulators can get involved. Trading halts could freeze short squeezes and prevent investors from executing trades.
Short Squeezes Require Specific Market Conditions, So Be Flexible When Hunting Them
Short squeezes can be exciting (and profitable), but they’re also rare and frequently misdiagnosed. Most heavily shorted companies will never see a squeeze; even if they do, timing it correctly is challenging. Investors must be ready to pivot quickly if the short squeeze conditions fail to materialize.
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