In a short squeeze, traders who have sold a stock short are forced to scramble. A rising share price leads those short sellers to buy shares to cover their positions. That demand can lead to a spiral higher: more shorts look to cover or face margin calls, leading to more buys and an even higher price.
The most famous short squeeze in recent years — and maybe ever — actually was engineered by Porsche (OTCMKTS:POAHY). In 2008, amid the financial crisis, Porsche used derivatives to corner the market in Volkswagen (OTCMKTS:VWAGY). The short squeeze was so intense that Volkswagen briefly became the world’s most valuable company.
Most squeezes are more rudimentary in nature, simply adding to potential gains as good news arrives. Recent rallies in Tesla (NASDAQ:TSLA), Nio (NYSE:NIO), and Luckin Coffee (NYSE:LK) likely all have been boosted by short squeezes, even if fundamental factors have contributed as well.
There are more names out there that could benefit from such a squeeze, including the following three stocks. But it’s important to remember that short squeezes aren’t necessarily long-term catalysts and that high short interest alone doesn’t make a stock a buy. Shorts, after all, get it right sometimes. Squeezes can’t and don’t come if a stock doesn’t make a fundamental move higher.
Indeed, these three stocks aren’t guaranteed to see a squeeze. But the potential exists. Shorts are betting heavily against these stocks and good news could be on the way.
Tanger Factory Outlet (SKT)
Real estate investment trust Tanger Factory Outlet (NYSE:SKT) could see a squeeze driven not by performance, but by market factors. SKT stock has declined over 60% from late 2016 highs. But its dividend has held up, in fact seeing raises in each of the last three years.
That combination has increased SKT’s dividend yield to over 9%. Meanwhile, the SPDR S&P Dividend ETF (NYSEARCA:SDY) is based on an index that weights its components by dividend yield. And so as SKT stock has fallen, the ETF has acquired more shares. At the moment, SDY owns 20.7 million Tanger shares — over 22% of the company.
There’s another problem, as Bloomberg’s Matt Levine detailed last week (others have noted key parts of the story as well). SDY has a fund rule that it can’t own a stock with a market capitalization under $1.5 billion. Tanger is under that line at the moment, with a market cap of $1.43 billion. And so the ETF likely has to exit the stake in its entirety by Jan. 31. That forced selling would swamp existing demand for shares, and potentially could send SKT stock down even further.
But there’s a catch, as Levine noted on Thursday via Bloomberg Intelligence. Fund sponsor State Street has to call in the shares it’s lent to short sellers, which actually could create a squeeze. SKT stock gained 10% on Jan. 8, perhaps in anticipation of that squeeze, though it has receded since.
Trading SKT in the near term seems best for those with experience, as the stock likely will be volatile. But with a stunning 58% of the float sold short, there’s real potential for a squeeze. Meanwhile, Tanger’s dividend yield and low valuation relative to FFO (funds from operations) make it an intriguing value play, as Aaron Levitt argued last year. The next two weeks will be eventful and could present an opportunity.
Restoration Hardware (RH)
Furniture retailer RH (NYSE:RH) seemingly has made sport of targeting short sellers in the past few years. The company has used buybacks, including accelerated repurchases, to drive its share price higher.
Performance has been impressive as well: adjusted EPS increased 180% in fiscal 2018 (ending early February 2019) and is guided up 46-48% in fiscal 2019. Buybacks have driven some of that growth, but RH also has seen steady revenue increases and expanding margins.
But short sellers haven’t given up on the trade. Over 34% of the float remains sold short. That seems unwise. RH still trades at a reasonable 16x forward price-to-earnings multiple. Berkshire Hathaway (NYSE:BRK.A,NYSE:BRK.B) has taken a 6.5% stake in the company. And history suggests the short side is the wrong side of this trade. Fourth quarter earnings, likely arriving in late March, could be the next catalyst for yet another squeeze.
Stitch Fix (SFIX)
Stitch Fix (NASDAQ:SFIX) has a little over 42% of its float sold short at the moment. That figure is inflated somewhat by the fact that only about 53% of shares outstanding trade freely, but that thin float can help catalyze a squeeze.
And SFIX stock does seem like the type of name that could catch a bid in this market. So far, it hasn’t: shares actually are down over the past eighteen months. But it’s a growth name with an attractive valuation on a price-to-revenue basis. A 2020 sales target of $2 billion suggests a barely 1x multiple, backing out the company’s cash on hand (Stitch Fix has no debt). Stitch Fix isn’t cheap on a profit basis, at 100x 2020 consensus earnings per share estimates, but it has the ability to grow into that valuation if the top line cooperates.
The high short interest admittedly suggests many traders see that revenue growth decelerating. But the bull case here is simple: if Stitch Fix meets its targets, SFIX stock likely rises. It could rise even faster than it otherwise might, as shorts are forced to cover.
As of this writing, Vince Martin has no positions in any securities mentioned.