So far, 2017 has been a rough year for short sellers. Broad markets are at or near all-time highs. With the exception of retail and oil & gas, the strength has been broad. And many stocks seen as overvalued by short sellers have instead soared — helped in part by a so-called “short squeeze.”
Tesla Inc (NASDAQ:TSLA) cost short sellers almost $4 billion just in the first quarter of 2017. The sale of Straight Path Communications Inc (NYSEMKT:STRP) to Verizon Communications Inc. (NYSE:VZ) created an epic short squeeze and likely another $1 billion-plus in losses. Many other short targets in tech have made huge gains, sending short sellers scrambling.
Short sellers haven’t given up however, and that leaves more opportunities for traders to target short squeezes — assuming the broad market and/or the companies targeted decided to cooperate. Here are 10 stocks with heavy short interest set up for a short squeeze — and to make a miserable 2017 for shorts even worse.
Stocks to Buy For a Short Squeeze: Chegg (CHGG)
There’s still room for upside in CHGG. And with 28% of the float sold short, and an average of 21 days’ volume to cover, there’s still room for another short squeeze in CHGG stock.
That’s precisely what happened after Chegg posted a blowout first-quarter report, which drove most of the recent gains. And Chegg isn’t done. Its transition away from money-losing textbook rental company to multi-faceted student platform is near completion. Revenue and users are growing sharply, and the company increasingly looks like a potential takeover target.
Chegg has been a risky stock — and still is. But in what CEO Dan Rosensweig has called “winner take all” markets like online tutoring, Chegg is having increasing success. And if Chegg indeed is the winner in those markets, CHGG shorts will turn out to be losers.
Stocks to Buy For a Short Squeeze: magicJack VocalTec (CALL)
magicJack VocalTec Ltd (NASDAQ:CALL) has been a target of short sellers for years now. And for the most part, the shorts have been right. Short interest peaked near 50% of the float in 2014; CALL stock would decline by over 60% within less than two years.
But this time might be different for CALL stock — and shorts. After a disastrous acquisition of business VoIP provider Broadsmart, CEO Gerald Vento was replaced amidst a number of activist campaigns. magicJack has received multiple buyout offers, with rumors spiking the stock double-digits on a number of occasions so far this year.
Even with the Broadsmart buy, magicJack still has substantial cash on its balance sheet. And even with declining revenue from its well-known magicJack product, the company as a a whole remains profitable, and generates substantial amounts of cash. A short of CALL stock made sense above $20.
Near $7, however, with M&A rumors swirling, it won’t take much to create a short squeeze in CALL stock. And if an actual buyout finally does materialize, those shorts could feel a significant amount of pain.
Stocks to Buy For a Short Squeeze: Chesapeake Energy (CHK)
Toward the end of June, Chesapeake Energy Corporation (NYSE:CHK) stock hit a 10-month low. Weak crude oil prices and a step down in natural gas prices have taken their toll on CHK stock.
But CHK shares have rebounded, bouncing about 12%. And there’s a clear path to further upside in CHK stock:
- 21.3% of the float sold short + balance sheet leverage + higher energy prices
Obviously, the “higher energy prices” aspect is the most difficult to predict. There have been some modest gains in crude of late, which no doubt have helped Chesapeake — CHK’s stock price is almost directly correlated to oil prices, despite its extensive natural gas production.
But if those higher prices come, CHK stock should gain — and possibly substantially so. Bear in mind that CHK traded above $8 as recently as December, that its balance sheet is cleaner than it was just a year ago, and that its operations have improved markedly over the past 24 months. That makes CHK stock one of the best plays on higher energy prices — and puts Chesapeake shorts at the risk of a short squeeze.
Stocks to Buy For a Short Squeeze: Sprint (S)
Starting in early 2015, shorts piled into Sprint Corp (NYSE:S) stock. Short interest in S stock rose from under 7% in early 2015 to around 30% barely a year later. A massive run in Sprint stock, which better than tripled from early 2016 levels, squeezed a number of those shorts — and that run almost certainly benefited from some of that short-covering.
Sprint still has enough bearish traders to create a short squeeze, with nearly 18% of its float sold short at the moment — 7.4 days’ worth of average daily volume. So far in 2017, Sprint stock is down 3.2%, providing a modest win for Sprint shorts.
That win may be short-lived, however. Momentum for some sort of tie-up between Sprint and T-Mobile US Inc (NASDAQ:TMUS) continues to build. Cable companies like Comcast Corporation (NASDAQ:CMCSA) and Charter Communications, Inc. (NASDAQ:CHTR) could be interested down the line as well. Sprint’s spectrum provides an enormous amount of value and flexibility, and majority owner Softbank Corp. (Japan) (OTCMKTS:SFTBY) could try and keep that value for itself.
S stock is in the summer doldrums — but M&A rumors and/or news seem likely to rise again at some point soon. Any optimism coming out of those rumors could make shorts uncomfortable, and create a short squeeze that will send S stock higher.
Stocks to Buy For a Short Squeeze: Fred’s (FRED)
Fred’s Inc. (NASDAQ:FRED) may not get a short squeeze, per se. But as a trade, FRED stock seems like an interesting way to try and get in ahead of what could be at worst a so-called “dead cat bounce.”
FRED stock has plummeted in the last two sessions after its plan to buy 1,200 stores from Rite Aid Corporation (NYSE:RAD) was a victim of the failed merger between Rite Aid and Walgreens Boots Alliance Inc (NASDAQ:WBA). FRED stock hit what appears to be a 15-year low on Monday.
The loss of the Rite Aid deal definitely hurts Fred’s, which had planned to become the third-largest pharmacy in the country behind Walgreens and CVS Health Corp (NYSE:CVS). But the recent declines might be a bit of an overreaction — and at the least should induce quite a few shorts to cover.
Some 44% of Fred’s float is sold short, which requires about 13 days’ worth of volume to cover. Many sold FRED short as a proxy bet on the Walgreens-Rite Aid tie-up failing. With that thesis having played out, they may cover and move on. And that should provide some demand for Fred’s in the near term.
Longer-term, FRED now trades at a substantial discount to where it traded before the whole merger drama played out. That too seems like it might be too much of an overreaction. Fiscal Q2 earnings should arrive in September — and Fred’s could benefit from a still-high short interest and low expectations.
From a trading standpoint, that makes FRED stock an interesting contrarian play — even if a full short squeeze doesn’t quite play out here.
Stocks to Buy For a Short Squeeze: Abercrombie & Fitch (ANF)
There’s no shortage of short squeeze candidates in the retail space. The problem for most of those stocks, however, is that the continuing margin compression and sales weakness in U.S. brick-and-mortar retail seems unlikely to abate. A short squeeze requires not only high short interest, but also good news. And few retailers have been able to create that good news over the past few quarters.
But Abercrombie & Fitch Co. (NYSE:ANF) might be an exception to the rest of its sector. Takeover rumors persist, with rival American Eagle Outfitters (NYSE:AEO) the most likely buyer. A&F has no debt, a still-viable brand in Hollister, and lease expirations will allow the company to shrink its footprint — and its expenses — substantially over the next few years.
ANF already has seen a few mini-squeezes of late, with takeover rumors spiking the stock above $14 twice in May. Back below $13, another rumor could drive double-digit gains for traders in ANF stock once again. And actual news could create real value for investors buying at current levels.
Stocks to Buy For a Short Squeeze: Oclaro (OCLR)
Until a couple of years ago, optical components maker Oclaro, Inc. (NASDAQ:OCLR) was largely left alone by short sellers. That was mostly because it was left alone by everybody. OCLR stock dipped briefly below $1 in 2013, and traded below $2 as recently as early 2015. But a monster run to $10 (before a recent pullback) has brought the bears out of hiding. Some 27% of OCLR’s float now is sold short.
But there’s more to the short interest than just valuation. Optical network peers like Applied Optoelectronics Inc (NASDAQ:AAOI) — which has an even higher short interest — Lumentum Holdings Inc (NASDAQ:LITE) and Finisar Corporation (NASDAQ:FNSR) have seen substantial volatility based on projected demand in China.
And on that front, there has been some good news of late for Oclaro. A buildout by China Mobile Ltd. (ADR) (NYSE:CHL) should spike demand, with Oclaro a prime beneficiary. A modest pullback from February highs leaves OCLR trading at just 12.4x 2018 analyst estimates — and closer to 10x backing out the company’s net cash. That balance sheet, and the hopes of a near-term boost in demand, could make Oclaro an attractive takeover target, whether by a Chinese fund or a U.S. rival. (Finisar Corporation (NASDAQ:FNSR) is often cited as a potential buyer.)
Shorts may have won a battle over the past few weeks. But the heavy short interest means it doesn’t take much good news to send OCLR stock sharply higher.
Stocks to Buy For a Short Squeeze: Match Group (MTCH)
The short interest in Match Group Inc (NASDAQ:MTCH) isn’t as high as it would appear at first glance. Some 28% of the float is sold short — but it’s a tiny float.
IAC/InterActiveCorp (NASDAQ:IAC) owns over 80% of MTCH stock, which limits that float. But it also leaves MTCH short sellers in a precarious position. There simply aren’t that many shares out there with which to cover a short – days to cover are near 10 at this point. That creates, pardon the pun, Tinder for a short squeeze in Match stock.
And there’s reason to see a squeeze coming in the not-too-distant future. User and revenue growth in the Tinder app continues to impress. The legacy Match.com property is performing better. International markets offer another opportunity: revenue overseas rose 30% in Q1, contributing to a 15% increase in company-wide revenue.
A reasonable valuation (17x 2018 EPS estimates) plus a thin float seems to create a dangerous situation for MTCH short sellers. MTCH stock has fallen 15% over the past few weeks, so many recent shorts are in the money. But it won’t take much for those recent gains to evaporate rather quickly.
Stocks to Buy For a Short Squeeze: FireEye (FEYE)
After a long, hard fall, shares of cybersecurity software firm FireEye Inc (NASDAQ:FEYE) finally have rebounded. FEYE stock is up 45% from mid-March lows — though still well below all-time highs near $55.
The gains haven’t deterred short sellers in FEYE stock: short interest has risen from about 13% at the beginning of the year to over 20% presently. And if FireEye is in the beginning of a turnaround, as InvestorPlace writer James Brumley argued recently, those shorts could see a major squeeze.
To be sure, FireEye still has a long way to go. The company remains unprofitable as its transition toward cloud-based offerings continues. But revenue is still growing, and FireEye does have a solid niche in cybersecurity. With expectations perhaps more modest, and short interest high, FEYE stock could be a classic short squeeze beneficiary off an earnings beat or M&A rumors.
Stocks to Buy For a Short Squeeze: Sportsman’s Warehouse (SPWH)
Again, retail stocks have been a recent target of short sellers — and most of those campaigns have worked out well so far. But Sportsman’s Warehouse Holdings Inc (NASDAQ:SPWH) could be an exception.
The Western-focused sporting goods retailers has struggled with firearms demand, but remains solidly — and consistently — profitable. Credit Suisse recently set a price target of $8 — 47% upside — though the market largely ignored that report.
But with 27% of the float sold short, a moderate debt load and room for store count expansion, SPWH should have some upside from current levels. With the short interest high, and expectations low, it doesn’t take much in the way of good news to set up a big short squeeze in SPWH stock.
As of this writing, Vince Martin has no positions in any securities mentioned.