[Editors Note: this article was originally published on February 5, 2020. It has since been updated to include the most relevant information.]
If the meteoric rise in Tesla (NASDAQ:TSLA) stock has taught investors anything over the past six months, it is to respect the power of a short squeeze.
During that stretch, Tesla stock has more than tripled — an unusually rapid rise for a stock of its size — as the long term growth outlook for the electric vehicle maker dramatically improved amid Model 3 production ramp, falling costs, rising margins, completion of the Chinese Gigafactory and strong early consumer reception for the Model Y and Cybertruck.
Not coincidentally, as Tesla stock has more than tripled amid all these favorable developments, short interest in the stock has fallen dramatically, with the percent of the float that is short dropping from 30% to 20%.
In other words, a big part of this Tesla rally has been fueled by a bunch of traders rushing to cover their short positions, as it has become obvious that the short thesis on Tesla is not as credible as it once was.
This isn’t terribly unusual. When heavily shorted stocks like Tesla do announce good news, shorts rush to cover, sparking what’s known as a “short squeeze”.
A short squeeze is when a heavily-shorted stock, for any number of reasons, starts to rise quickly in price, forcing shorts to close out their short positions, and buy back their borrowed shares. This, in turn, puts more buying pressure on a stock, as former short-sellers become current buyers, and often results in the stock price shooting higher.
In early February, I put together a list of seven heavily shorted stocks that were attractive short squeeze candidates with potentially enormous upside in the coming months. From that list, the best short squeeze stocks to buy in 2020 are:
- Tesla (TSLA)
- Stitch Fix (SFIX)
- Plug Power (PLUG)
- Express (EXPR)
- Beyond Meat (BYND)
- Bed Bath & Beyond (BBBY)
- Wayfair (W)
Less than three weeks after I first recommended these short squeeze stocks, many of them have already posted explosive returns, with three of them up more than 25% month-to-date.
Will these heavily shorted stocks keep popping on short squeeze action? Will the ones that haven’t popped yet, start to do so in the coming months? I think the answer is “yes” for both questions. Here’s a deeper look at why.
Short Squeeze Stocks to Pop: Tesla (TSLA)
% of Float that is Short: 20%
% Return in February: 38%
Interestingly enough, the short squeeze in Tesla stock may not be over, and that may explain why this stock keeps shooting to new highs every single day.
Despite the meteoric rise in shares, about 20% of the Tesla float still remains short. That’s a huge number. That means that about one of every five publicly available shares is betting against the company. And that’s after the stock skyrocketed to $800.
In essence, the still-huge short interest in Tesla stock is a factor of some high-conviction shorts doubling down on their bets as the stock price has gone up. But many of these high-conviction short-sellers are fund managers, and if their Tesla short positions continue to weigh on performance, they may be forced to close them, which would lead to a bunch of covering and more short squeezing.
Could it happen? Could more short squeezing push Tesla stock above $1,000? Perhaps. The company has a lot of momentum right now. Given catalysts such as international expansion and Model Y launch on the horizon, it’s quite likely the company sustains this momentum. If they do, shorts may rush to cover, and Tesla stock will go even higher.
Stitch Fix (SFIX)
% of Float that is Short: 44%
% Return in February: 28%
Online personalized styling service Stitch Fix (NASDAQ:SFIX) is one of the most hated growth stocks on Wall Street, with more than 40% of the company’s publicly available shares sold short.
But, I think this hate is undeserved. After all, Stitch Fix has a very bright future in the retail world.
Long story short, Stitch Fix makes apparel shopping easier, more efficient and more convenient (customer answers a few questions online, Stitch Fix’s stylists learn the customer’s style and then Stitch Fix sends the customer personally tailored and curated clothes). Of course, this streamlined service is offered for a price (they charge a fee for providing these styling services). The “for a price” part inherently limits Stitch Fix’s addressable market. Not everyone has the extra change to pay for a personal stylist.
But, the “making everything easier” part is why Stitch Fix will grow nicely in upper-income verticals. In those verticals, time is arguably more valuable than money, and saving on the hassle of having to fight crowds at retail stores and pick out clothes that fit is worth a few extra bucks.
Also of note: Stitch Fix has professional stylists. Most consumers aren’t professional stylists. So, Stitch Fix will probably deliver not just quicker, but also better outcomes than picking out clothes yourself.
Because of this, Stitch Fix will continue to grow at a healthy pace over the next several years. As they do, shorts will find their backs against the wall. They will rush to cover, and this will provide extra juice for a Stitch Fix rally.
Plug Power (PLUG)
% of Float that is Short: 25%
% Return in February: 41%
Hydrogen fuel cell (HFC) maker Plug Power (NASDAQ:PLUG) has been on a huge run lately, with shares up 120% over the past year and 40% in February alone. But, traders are betting that this rally will run out of steam, as short interest in the stock has climbed from 17.5% a year ago to 25% today.
The short trade is pretty simple. HFC cars have, time and time again, failed to gain mainstream traction, for various reasons ranging from safety hazards to lack of charging infrastructure. Now that plug-in electric batteries are better than ever, it’s less likely than ever than HFC cars gain traction. As HFC cars continue to struggle with adoption, Plug Power stock will give back its 2019 gains.
But this short thesis misses a huge point. That is, the Plug Power growth narrative today isn’t about consumers buying and driving more HFC cars. It’s about big companies buying and deploying more HFC forklifts in their warehouses.
And that’s exactly what they’re doing. HFC forklifts have significant cost-saving and space-saving advantages over battery electric forklifts because they last longer, run at full power longer, don’t need much maintenance and don’t require a ton of storage space. Corporations are finally starting to realize that they can cut costs and improve efficiency with HFC forklifts, and as they do, more of them are signing big contracts with Plug Power.
Over the next few years, Plug Power will keep on boarding new big customers, while current customers will up their spend. This double tailwind will freak shorts out. They will rush to cover, and this covering will provide a meaningful lift to PLUG stock.
% of Float that is Short: 27%
% Return in February: 11%
A lot of traders are betting against struggling mall teen retailer Express (NYSE:EXPR), and who can blame them? After all, mall retail has been a losing game. So has teen apparel retail. Express operates in the overlap of those two industries, and the numbers here speak for themselves.
For the past few years, Express has suffered steady drops in comparable sales, revenues, margins, profits and its stock price.
But a turnaround could be coming, which would fuel a massive short squeeze in Express stock.
Specifically, Express management recently unveiled a turnaround plan focused on slimming down and cutting costs. In order to do that, management is going to close about 100 stores and focus investment and marketing dollars into its remaining stores.
In theory, it’s a smart move. Shutting down under-performing stores and remodeling over-performing stores should dramatically increase sales per square foot. At the same time, it shouldn’t have any impact on expenses per square foot. Higher sales per square foot on stable expenses per square foot leads to positive operating leverage, profit margin expansion and bigger profits.
Is that how things will play out? Maybe, maybe not. But if it does, shorts will be scared, since at 0.1-times trailing sales, EXPR stock is priced for extinction. If shorts get scared, they’ll rush to cover. If they rush to cover, then a huge short squeeze could push Express stock meaningfully higher.
Beyond Meat (BYND)
% of Float that is Short: 21%
% Return in February: 6%
Plant-based meat maker Beyond Meat (NASDAQ:BYND) has been one of the hottest stocks in the market. It has also been one of the most heavily shorted stocks in the market. As of this writing, more than 20% of the float is short.
The short thesis here is almost purely centered around valuation. Bears don’t get how Beyond Meat is a $6.5 billion company, with only $300 million in projected sales this year. They think the valuation is all hype. Hype doesn’t last, so why not bet against it?
But this short thesis lacks scope.
In the big picture, plant-based meat today, is where electric vehicles were five to ten years ago, and Beyond Meat is the Tesla of the plant-based meat space. That is, plant-based meat is the future of meat consumption, because it’s more cost-efficient in the long run (like electric vehicles are most cost-efficient in the long run) and it’s environmentally friendly (like electric vehicles are environmentally friendly). Thus, while plant-based meat represents a fraction of the global meats market today, it’s penetration into the market will only rise exponentially and to significant levels over the coming years.
Even further, Beyond Meat is the brand in plant-based meat, much like Tesla is the brand in electric vehicles. The bigger Beyond Meat gets, the further they establish themselves as the brand. The more they establish themselves as the brand, the bigger they get. This virtuous growth cycle is what will enable Beyond Meat to be the biggest player in the huge plant-based meat market in a decade.
In other words, much like Tesla, Beyond Meat will prove the bears wrong in the long run. We’ve all seen what has happened with Tesla stock over the past decade. A similar dynamic could play out with Beyond Meat stock over the next decade.
Bed Bath & Beyond (BBBY)
% of Float that is Short: 68%
% Return in February: -14%
To nearly no one’s surprise, another one of the most heavily shorted stocks in the market is that of struggling department store operator Bed Bath & Beyond (NASDAQ:BBBY).
In a nutshell, the emergence of Amazon (NASDAQ:AMZN) and e-commerce have significantly disrupted Bed Bath & Beyond’s operations. The company has struggled to adjust. Traffic, sales and profits have all dropped, as has the stock price. Most traders are betting on the idea that all of this will continue until Bed Bath & Beyond dives into the retail graveyard.
But there’s reason to believe that these trends won’t continue, and that reason is Mark Tritton.
Mark Tritton was the Chief Merchandising Officer over at Target (NYSE:TGT). He was instrumental in turning that sinking retail ship into a red hot one through an impressive omni-channel transformation. Now he’s the Chief Executive Officer at Bed Bath & Beyond, and he’s trying to do the same thing he did at Target over at Bed Bath & Beyond.
This turnaround is off to a slow start. Management announced that holiday quarter comparable sales at the company fell 5.4%. That’s not great.
But, the big changes are still to come. In 2020, management will close dozens of stores and deploy hundreds of millions of dollars to store remodels, omni-channel capability expansion, and e-commerce enhancements. The sum of those big changes should drive financial trend improvements in coming quarters.
Those improvements will scare shorts. They will rush to cover, and Bed Bath & Beyond stock will pop on a big short squeeze.
% of Float that is Short: 43%
% Return in February: -15%
Furniture e-retailer Wayfair (NYSE:W) has never had a problem with growing its top-line. Over the past several quarters and years, Wayfair has sustained impressive 20%-plus revenue growth as the company has benefited from a secular consumption shift towards online shopping.
But, Wayfair has always had a problem with profitability. That is, the company has never struck a profit, and likely won’t any time soon. This lack of profitability is why over 40% of Wayfair’s float is short.
Sure, if Wayfair never strikes a sizable profit, the shorts will be right, and Wayfair stock will sink.
But, I don’t think that’s likely to happen. Instead, this feels like an Amazon situation. That is, much like Amazon did in the early days, Wayfair is running at slim margins right now to keep prices low and gain significant market share in the furniture retail world. At some point, Amazon gained enough scale where those low prices were actually high enough to generate a profit. From there, Amazon’s profits grew by leaps and bounds.
Given the sector shift towards online shopping, it’s likely that Wayfair gets to that point sometime soon. Once they do, profits will start growing quickly, shorts will start covering in bulk, and Wayfair stock will shoot higher.
Luke Lango is a Markets Analyst for InvestorPlace. He has been professionally analyzing stocks for several years, previously working at various hedge funds and currently running his own investment fund in San Diego. A Caltech graduate, Luke has consistently been rated one of the world’s top stock pickers by TipRanks, and has developed a reputation for leveraging his technology background to identify growth stocks that deliver outstanding returns. Luke is also the founder of Fantastic, a social discovery company backed by an LA-based internet venture firm. As of this writing, Luke Lango was long PLUG and BBBY.