There’s a fundamental mathematical proposition that makes shorting stocks risky. A short sale — a sale of borrowed stock, made with the intention of buying it back at a cheaper price later — in theory has unlimited losses. A long investor can only lose 100% of her money at most. But a short could lose multiples of the capital originally at risk.
One of the better examples is recent history is Straight Path Communications. Traders had shorted nearly half of that company’s shares; the stock rose 150% in a single day after an announcing a sale to AT&T (NYSE:T) and kept gaining in an ensuing bidding war with Verizon (NYSE:VZ).
One of the smaller — but still substantial — risks is that of a “short squeeze.” When a heavy number of short sellers target a stock, and that stock moves, those traders need to satisfy margin calls. As a result of those margin calls (or just a desire to exit at a moderate loss) short sellers wind up adding to demand for the stock as they cover. In some cases, that demand can turn into a stampede, sending the price ever higher. A fun example here is the so-called “corner” of Volkswagen (OTCMKTS:VLKAY) by Porsche (OTCMKTS:POAHY) back in 2008.
Even on a much smaller basis, though, short squeezes can force shorts out of their positions (hence the name). And those squeezes benefit long investors, who see their share prices rise. That makes short-squeeze stocks an interesting group to target for both traders looking for a squeeze to play out and for investors looking for contrarian names.
These 20 stocks all have heavy short interest and definite short squeeze potential. Not all are buys, necessarily — short sellers do get it right sometimes — but they are interesting names for more aggressive investors, and traders, to consider going forward.
[Editor’s note: This story was originally published in July 2018. It has since been republished and updated with new information.]
20 Short-Squeeze Stocks: Tesla (TSLA)
Tesla (NASDAQ:TSLA) has become the biggest battleground stock in the market, and I don’t think it’s particularly close. Alibaba (NYSE:BABA) is the “world’s most shorted stock,” but many BABA shorts are focused on Chinese economic worries. There’s likely some hedging activity due to pairs trades with Altaba (NASDAQ:AABA) as well.
With over 27% of the float shorted, and a committed shareholder base, a TSLA short squeeze could be epic. Tesla’s own CEO Elon Musk has predicted such a squeeze on several occasions, including on Twitter in May:
Looks like sooner than expected. The sheer magnitude of short carnage will be unreal. If you’re short, I suggest tiptoeing quietly to the exit … https://t.co/A0Q90pSLKA
— Elon Musk (@elonmusk) May 5, 2018
Of late, the shorts have had the upper hand, with TSLA dipping below $300 on Tuesday and Wednesday. While I wasn’t convinced previously, Tesla’s third-quarter earnings proved the company can turn a profit. If Elon Musk & Co. continue to print green, the longs will be in control and the squeeze that Musk and so many TSLA shareholders have predicted will finally come to pass.
20 Short-Squeeze Stocks: AMC Entertainment (AMC)
The bear case for AMC Entertainment (NYSE:AMC) is pretty simple. Movie theater attendance is declining. Theater operators like AMC have a high level of fixed costs, so further declines will have an amplified impact on profitability. That, in turn, will be magnified by AMC’s heavy debt load.
In a bearish scenario — think an economic correction that leaves consumers looking to cut spending and choosing to watch Netflix (NASDAQ:NFLX) on Friday night — AMC could wind up at zero.
Intuitively, the short case for AMC makes some sense. With a thin float (only about 40% of shares outstanding), some 25% of the float now is sold short. But there’s a bullish case for this short-squeeze stock as well. When it comes to 2017, in particular, the slate was rather poor. If studios provide AMC with better movies, the viewers could return. In the meantime, AMC is adding upscale seating and food and dining to create a true experience for theatergoers in addition to simply watching a movie.
I do see some value in the bull case; I called out AMC in February as a high-risk, high-reward play. So far this year, the market hasn’t made up its mind. AMC has risen 2% YTD, with trading rather choppy. But with a 5%-plus yield, a new monthly subscription pass, and (perhaps) better films going forward, one big quarter could change that.
20 Short-Squeeze Stocks: Tuesday Morning (TUES)
For a stock with a market cap of barely $130 million, Tuesday Morning (NASDAQ:TUES) has received a lot of attention from short sellers. Over 30% of the float is sold short, with short sellers likely betting that Tuesday Morning is on a long-term path to bankruptcy.
Fundamentally, there’s a case that TUES will head to zero. Debt has built up over the past few years. Profits have plunged in fiscal 2017 (ending June), and a recovery this year still leaves the company well below past peaks.
But there’s also a path to upside here beyond TUES being one of the smaller short-squeeze stocks. A long-running effort to add a new distribution center and fix the company’s supply chain finally is coming to an end. Those expenses should be a thing of the past — and the investment may help increase gross margin and lower freight costs.
Same-store sales have been reasonably solid. If Tuesday Morning can get back to executing on point, it can reverse at least some of the losses seen over the past year. (TUES has dropped from above $20 at the beginning of 2015 to under $3 now.) And that probably would lead short sellers to run for the exits, perhaps as soon as the company’s Q4 report which is likely coming next month.
20 Short-Squeeze Stocks: The Children’s Place (PLCE)
Source: Mike Mozart via Flickr
The retail sector as a whole is fertile ground for shorts, with many stocks seeing short interest of 20% or higher. And it’s likely that the gains in the group from November lows have come at least in part from shorts covering after big downside in 2016-2017.
At the moment, The Children’s Place (NASDAQ:PLCE) falls just short of that 20% figure, but still has heavy short interest — and this is a case where I think the shorts have it wrong.
PLCE does have quite a bit of mall exposure, which is always a concern. A declining U.S. birth rate could provide a modest secular headwind as well. But The Children’s Place is way ahead of peers in adapting to the omnichannel model, with 26% of revenue now moving through digital channels. 300 stores are being closed over the next few years as well, limiting the company’s exposure to struggling “B” and “C” mall properties.
With near-term SG&A increases coming off the books, EPS growth should be solid. And a $12 EPS target for FY20 suggests the stock could reach $190, with a reasonable 15x P/E multiple plus the company’s cash in the bank.
I get why shorts have targeted retailers; indeed, I’ve shorted several myself. But PLCE looks like the wrong target in the space, and it could make that clear over the next couple of years.
20 Short-Squeeze Stocks: Tanger Factory Outlet Centers (SKT)
One way to short retail, of course, is not to short the retailers themselves, but instead focus on their mall landlords. One of the biggest targets has been Tanger Factory Outlet Centers (NYSE:SKT). SKT has a whopping 27% short interest, a huge figure for any REIT, let alone one paying a nearly 6% annual dividend.
The dividend isn’t the only reason the short looks dangerous, particularly with SKT bouncing off an eight-year low reached in early May. Occupancy remains above 95%. Tanger remains nicely profitable (though there is a lot of debt here). Brands have moved from using the outlet channel as a dumping ground for unsold inventory to actually designing “MFO” (made for outlet) merchandise at lower price points. As some of those retailers abandon traditional malls, the importance of the outlet channel should only strengthen.
That said, I’m not quite ready to bet against the bears when it comes to SKT. Online clearance sales can be a more efficient — and more profitable — way to move merchandise. Demand in apparel, in particular, continues to move toward smaller, more unique brands that won’t use the outlet channel. And once occupancy turns — if it does — the business model here can get very unwieldy very quickly. Tanger already has lowered rent, and more concessions will undercut its profits, and over time eventually put the dividend at risk.
There’s a reasonable long-term argument to be made for both sides when it comes to SKT. But in the near-term, that short interest could determine how the stock moves, particularly ahead of Q2 earnings next week.
20 Short-Squeeze Stocks: Papa John’s (PZZA)
It’s been an awful few months for Papa John’s International (NASDAQ:PZZA), both as a company and as a stock. PZZA stock has fallen steadily since the end of 2016, losing almost half of its value over the stretch. The declines have only accelerated of late as founder John Schnatter resigned after using a racial slur. The Papa John’s board of directors followed that resignation by instituting a “poison pill” that would prevent Schnatter from trying to take over the company.
With PZZA down big and short interest still near 20% of the float, it’s possible the stock could bounce, like many short-squeeze stocks do at some point. A plan to move forward — and better compete against Domino’s Pizza (NYSE:DPZ), who continues to outperform — could help. So could next week’s earnings report, if Papa John’s can show that the negative publicity hasn’t hurt sales.
But I’d note that Josh Enomoto advised caution toward the stock earlier this month, and that since January, short interest actually has come down quite a bit from 32% to the current 20%. Even that level of short covering hasn’t kept PZZA from the lows — and it will take more than a short squeeze to lift the stock back up.
20 Short-Squeeze Stocks: Mattel (MAT)
Mattel (NASDAQ:MAT) is another heavily-shorted consumer stock going through hard times. There have been some self-inflicted wounds, including the loss of the Walt Disney (NYSE:DIS) license to rival Hasbro (NASDAQ:HAS). Barbie sales have struggled, and other products like Hot Wheels similarly seem to be the victim of changing consumer tastes.
There is hope for a rebound. Mattel gained sharply after Q1 earnings in late April, and expectations are low enough that shorts could get squeezed by another strong report. But longer-term, I still don’t see enough to jump in just yet, as I wrote back in May. The shorts may not necessarily be right about the stock price, but there’s a reason they have targeted Mattel as a business.
20 Short-Squeeze Stocks: Applied Optoelectronics (AAOI)
Few stocks in the market have a higher short interest than Applied Optoelectronics (NASDAQ:AAOI). And few stocks have seen more volatility than AAOI over the past 18 months. Whether the shorts are causing the volatility or being attracted by it is an interesting question.
Whatever the cause, AAOI has been an absolute roller-coaster. The stock went from under $25 in January 2017 to $103 in July. It then gave back nearly every dollar of those gains by late April before again rallying. The stock has gained 70% from its 52-week low and still has roughly doubled since the U.S. presidential election.
Where AAOI will go from here is anybody’s guess. A continuing loss of share with Amazon.com (NASDAQ:AMZN) in its Web Services business has been a long-running concern. But AAOI is showing growth with other customers, and the stock looks cheap, at 14x forward EPS.
Q2 earnings next month could draw some fireworks. Any disappointment will only embolden the shorts, and could lead AAOI to give back those recent gains. A beat, however, could create a serious short squeeze — and perhaps send AAOI on the path toward another big rally. Given the options market is pricing in about a 19% move between now and the Friday after earnings, investors need to be quite sure about which side they choose to take.
20 Short-Squeeze Stocks: B&G Foods (BGS)
Source: Michel Curi via Flickr
B&G Foods (NYSE:BGS) is a classic “value trap or value play?” argument. Bulls point to an attractive valuation and a 6%-plus dividend. Bears point to margin pressure across the entire consumer products industry and the company’s debt.
I recommended BGS back in May, and even with the stock up about 12%, I still see more upside. B&G isn’t just one of the highest-yielding short-squeeze stocks. It could be a takeout candidate, with Post Holdings (NYSE:POST) a rumored suitor. And a short interest still near 35% of the float leaves a lot of covering left should BGS keep moving higher.
20 Short-Squeeze Stocks: Synaptics (SYNA)
Touchscreen and touchpad developer Synaptics (NASDAQ:SYNA) offers another intriguing value trap/value play debate. SYNA stock is cheap, at 10.5x FY19 consensus EPS estimates. Its exposure to smartphones and leadership in its space — including a recently developed in-display fingerprint sensor — would seem to set the company up for growth going forward.
But that might not be the case. Exposure to the high end of the semiconductor market through Samsung — which drove 19% of FY18 revenue — could be a weakness, not a strength. Slowing unit sales will hurt Synaptics revenue, which fell 11% in fiscal Q3 and is down 4% YTD.
As a result, a number of traders are short the seemingly cheap stock, with 22% of the float sold short. That looks risky right now, though. A rumor about a potential takeover of SYNA by Dialog Semiconductor (OTCMKTS:DLGNF) squeezed some of those shorts. If that rumor comes true, SYNA shorts will see even more pain.
20 Short-Squeeze Stocks: Overstock (OSTK)
Overstock.com (NASDAQ:OSTK) and its CEO Patrick Byrne have been battling short sellers seemingly for their entire existence on the public markets. Byrne sued 10 securities firms back in 2007 alleging “naked” short selling — ie, shorting without actually borrowing the shares, which is illegal. (The case was eventually settled in 2015.)
With Overstock talking up its blockchain initiatives — including a plan to manage stock borrowing for short sellers — the shorts have returned. Some 43% of the OSTK float is sold short, and it puts Overstock in an interesting position.
After all, the legacy business continues to struggling, with barely 1% margins. Byrne has pointed to competition from sellers like Wayfair (NYSE:W), which undercut on pricing and overspend on advertising. And while Byrne makes some good points, the fact is that in 20-plus years Overstock simply hasn’t really ever been a consistently profitable company.
As for the blockchain efforts, including an ICO through subsidiary tZERO, their promise likely is in the eye of the beholder. I argued after the company’s Q4 report in April that there was plenty of reason for caution. With OSTK back at similar levels, I still think that’s the case. But if blockchain mania resurfaces, or the legacy business gets fixed (or sold), OSTK could shoot higher on the backs of its short sellers, much like it did in racing above $80 at the beginning of the year.
20 Short-Squeeze Stocks: SunPower (SPWR)
Source: via SunPower
Solar stocks as a whole haven’t done well, and SunPower (NASDAQ:SPWR) has been no exception. The stock has fallen by over 80% from 2014 highs, and short sellers seem to believe that weakness will continue, with some 28% of the float sold short at the moment
That said, over the past 21 months SPWR has settled into a trading range centered around a price of roughly $8. Savvy traders can look to the stock for some short-term moves — perhaps driven by short covering if SPWR can post a solid quarter next week.
Longer-term, though, this remains an industry that, as many bears point out, has been around for over a century and really never provided a return on the capital invested. Enomoto wrote earlier this month that SPWR was one of four solar stocks to avoid — and I’m inclined to agree. That doesn’t mean that traders can’t capitalize on a short squeeze if they time it right.
20 Short-Squeeze Stocks: Revlon (REV)
A short squeeze may be the only way out for cosmetics maker Revlon (NYSE:REV), which looks to be in serious trouble. Sales are falling, with a 9% constant-currency decline in Q1 after a 6% decline in 2017, excluding the contribution from acquired Elizabeth Arden. Profits are plunging, with Adjusted EBITDA dropping nearly 38% last year, and a whopping 87% in Q1.
Meanwhile, Revlon has a concerning amount of debt outstanding — and even its bond prices are signaling a clear risk of bankruptcy. The company’s 2024 bonds trade at just 55 cents on the dollar, and yield a whopping 19.3% to maturity.
A new CEO may spark a turnaround, but if she doesn’t, the shorts will celebrate, as Revlon stock could be headed for zero. Majority shareholder Ron Perelman could have something to say about that, but he’ll need to show some real improvement in the business first.
20 Short-Squeeze Stocks: Energous (WATT)
Energous (NASDAQ:WATT) already has squeezed its short sellers once. FCC certification for its wireless charging pad sent the stock up over 200% in a single day last December.
But the gains slowly have faded — and the shorts have remained stubborn. Over 31% of WATT’s float still remains sold short. Meanwhile, WATT has dipped to its lowest levels since its explosive one-day rise. Despite the optimism following the FCC decision, real questions remain about the practical limitations of the technology and its applicability in the real world.
All told, this is a company that could use some good news, perhaps in fiscal Q2 results next month. With shorts still arguing that WATT is worth basically zero, it won’t take much to either convince those shorts they’re wrong — or price them out of their positions.
20 Short-Squeeze Stocks: Intercept Pharmaceuticals (ICPT)
Early-stage biotechnology companies are some of the highest-risk, highest-reward stocks in the market. Positive trial data can create huge gains — and lead to a profitable buyout. Disappointing drug results, however, can move a stock from having a billion-dollar market cap to being close to worthless.
Shorting those stocks is even more of a high-risk, high-reward game. But shorts are targeting Intercept Pharmaceuticals (NASDAQ:ICPT), with over 20% of the float sold short.
Intercept isn’t just an early stage company, as its Ocaliva is approved to treat a chronic liver disease. But a $2.8 billion market cap is based largely on the company’s potential in developing treatments for NASH (non-alcoholic steatohepatitis).
Shorts are betting not necessarily that Intercept’s drugs will fail, but that competitors will get there first. A number of companies are targeting the space, including Madrigal Pharmaceuticals (NASDAQ:MDGL), whose stock rose 145% on May 31 after promising Phase II results. Those gains actually seem to have helped ICPT, whose stock has risen 45% just since early April. And those shorts left remaining are left facing a painful squeeze if ICPT can keep pace with its up-and-coming rival.
20 Short-Squeeze Stocks: Accelerate Diagnostics (AXDX)
Accelerate Diagnostics (NASDAQ:AXDX) has been a short target for some time now. Citron Research placed a $1 price target on the stock back in 2015.
But bulls and bears mostly have fought to a draw, with AXDX stock mostly range-bound since 2014. Still, the shorts persist, with nearly 48% of the float sold short at the moment. And with AXDX facing competition, still generating close to zero revenue and dealing with still-present questions about its core infection testing platform, the short case does seem compelling.
If Accelerate can finally fulfill its promise, however, those shorts could see a major squeeze.
20 Short-Squeeze Stocks: Hertz (HTZ)
It’s not hard to see why shares of Hertz Global Holdings (NYSE:HTZ) have slipped sharply of late – or why traders have sold short roughly 27% of the stock’s float. The rise of ride-sharing companies like Uber and Lyft adds a significant competitive threat. “Peak auto” concerns could pressure used-car prices — and upend the business model for Hertz and rival Avis Budget Group (NASDAQ:CAR).
So there are two key catalysts here that are attractive to shorts: a secular headwind to revenue and a potential negative revaluation of the assets. And the shorts are winning at the moment: after a rally that began late last year, HTZ has tumbled more than 40% from January highs.
When it comes to both HTZ and CAR, I tend to side with the shorts. The rental car business simply has too much pressure on it. But investors who see the business differently could finda real opportunity in HTZ at its lowest level since it separated its equipment rental business back in 2016. And if Hertz can show some signs of life in the coming quarters, short-covering could lead HTZ stock to rally once again.
20 Short-Squeeze Stocks: Pandora (P)
Fundamentally, the short case for Pandora Media (NYSE:P) looks close to rock-solid. Pandora never has turned a consistent profit, and continues to lose money and burn cash. Spotify (NYSE:SPOT) now is taking market share, and Apple (NASDAQ:AAPL) is targeting the streaming space as well.
The stock has performed nicely of late, rallying to $8. But it’s worth remembering that Pandora tried to sell itself last year and couldn’t get any takers. Rather, Sirius XM (NASDAQ:SIRI) took a large stake in the company.
It’s that stake that could make P interesting going forward. Sirius has the ability to squeeze those shorts — or to take Pandora out if it sees improvement. That stake isn’t enough to make me personally buy at $8, but it does look like the biggest risk to a short here.
20 Short-Squeeze Stocks: BitAuto (BITA)
Source: via BitAuto
The short interest for Chinese automotive website Bitauto (NYSE:BITA) is inflated somewhat by a thin float. Less than 20% of the company’s shares outstanding trade freely. But over half of those shares are sold short — and here, too, the shorts have been winning. BITA has been halved from early November highs.
More trouble could be on the way. Bitauto continues to be a distant second to rival Autohome (NYSE:ATHM), whose market cap is more than six times that of Bitauto.
Disappointing fiscal Q1 earnings in June led BITA even further down, but the stock has stabilized in the six weeks since. With a cheap valuation (12x forward EPS) and the heavy short interest, this looks like a stock set to move sharply. The question is in which direction.
20 Short-Squeeze Stocks: Match Group (MTCH)
Source: Bixentro via Flickr
Match Group (NASDAQ:MTCH) is another stock whose short interest is inflated by a thin float. 50% of the float is sold short, but that figure represents less than 9% of outstanding shares. IAC/InterActiveCorp (NASDAQ:IAC) owns most of the company, which leaves few shares to trade on the public markets.
The short case here is based on both valuation and competition. Notably, Facebook (NASDAQ:FB) entered the dating space in May, leading to a sharp decline in MTCH shares. Interestingly, short interest actually has come down since that event, which caused a two-day, 27% decline in Match Group stock, some of which has been recovered.
But I liked MTCH back in February in the mid-$30s, and even with the Facebook threat and a modestly higher share price, I still do. Valuation isn’t nearly as dear as headline multiples suggest. Tinder continues to grow. And the namesake platform’s dominance in online dating, barring big success from Facebook, seems relatively assured. There’s a lot of negativity here at the moment — and a heavy short interest. But I believe both will eventually pass.
As of this writing, Vince Martin was long shares of The Children’s Place. He has no positions in any other securities mentioned.
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