- Stitch Fix (NASDAQ:SFIX)
- Plug Power (NASDAQ:PLUG)
- Beyond Meat (NASDAQ:BYND)
- Tesla (NASDAQ:TSLA)
- Wayfair (NSYE:W)
- Chegg (NASDAQ:CHGG)
- Blue Apron (NASDAQ:APRN)
- EverQuote (NASDAQ:EVER)
- Canopy Growth (NYSE:CGC)
- Nio (NYSE:NIO)
- Snap (NYSE:SNAP)
- Match Group (NASDAQ:MTCH)
- Revolve (NASDAQ:RVLV)
- Catasys (NASDAQ:CATS)
- Tabula Rasa Healthcare (NASDAQ:TRHC)
One of the most powerful concepts in the investing universe is the short squeeze. A squeeze happens when investors betting against a short-squeeze stock are forced to cover their positions by “buying back” borrowed shares.
In essence, in order to short a stock, one must find shares to borrow, with the pledge to buy those shares back at a future date. When a heavily-shorted stock, for any number of reasons, starts to rise quickly in price, it often forces short-sellers to “cut their losses” and buy back borrowed shares. This puts more buying pressure on an already hot stock, and can often result in a rapid and dramatic increase in the stock price.
Case-in-point: the S&P 500 over the past two months.
As the markets tumbled in late February and early March on novel coronavirus pandemic concerns, traders piled into the “short the market” trade. Then, once the news flow surrounding the virus started to improve in mid-March, investors were forced to close out those short positions in a hurry, thereby providing fuel for what has been a record 30% bounce in the S&P 500 since then.
This is not a unique dynamic. Several times every month, short squeezes happen in the market, and produce huge overnight gains in individual stocks.
Accordingly, we are going to take a look at some of the most heavily-shorted stocks in the market today, with an eye towards ones that could pop big on a short squeeze in the coming months.
Short-Squeeze Stocks Wound Tight: Stitch Fix (SFIX)
Percentage of Float Short (According to Finviz): 37.6%
With a short interest hovering near 40%, online personalized styling service Stitch Fix is one of the most heavily shorted stocks on the market. This heavy shorting positions the stock for a nice short squeeze in the back-half of 2020.
Long story short, the “no one is spending money on clothes” trade has become very crowded. But, the science surrounding the coronavirus pandemic is changing to show that Covid-19 may not be much more fatal than the flu, thanks to widespread antibody testing. If this new science holds up, then policy will lean towards more aggressive economic re-opening, and consumer behavior will normalize more quickly than expected.
Net net, consumers will start buying clothes — and spending money on things like Stitch Fix — far sooner than most expect.
Inevitably, this will lead to Stitch Fix reporting second-half numbers well ahead of expectations, which will force a bunch of short-sellers to cover, and spark a big short squeeze rally in SFIX stock.
Plug Power (PLUG)
Percentage of Float Short: 21.9%
One of the more interesting stocks on this list of heavily shorted stocks with big short squeeze potential is small-cap alternative fuel company Plug Power.
Plug Power makes what are known as hydrogen fuel cells, or HFCs for short. Thanks to breakthroughs in HFC technology over the past few years, HFCs today are a cost-effective alternative fuel solution for companies in short-range, dense-usage situations, like warehouses. As such, over the past quarters, several major warehouse operators like Amazon (NASDAQ:AMZN) and Walmart (NYSE:WMT) have begun to deploy Plug Power’s HFC forklifts throughout their warehouses.
Many more companies will follow suit over the next few years. As they do, Plug Power’s revenues and profits will charge higher, shorts will rush to cover, and all of that action will spark huge gains in PLUG stock.
Beyond Meat (BYND)
Percentage of Float Short: 18.2%
The short thesis on plant-based meat maker Beyond Meat is pretty simple: the plant-based meat trend is a fad, and Beyond’s nosebleed valuation will unwind in a catastrophic way as the growth trajectory falls flat over the next few years.
That simply won’t happen.
Thanks to the widespread proliferation of social media, consumers today are more socially and environmentally aware than ever before. This awareness is sparking gradual shifts in consumer behavior towards choosing products and services that are socially and environmentally positive. Think electric cars. Think solar energy.
And, yes, think plant-based meat. For animal welfare, resource conservation, and carbon emission reduction purposes, plant-based meat fits perfectly into the environmentally and socially positive mindset of the modern consumer. As such, the plant-based meat market will continue to grow by leaps and bounds over the next several years, and Beyond Meat will leverage its branding, technology, and distribution advantages to sustain leadership in this growth market.
Net net, the Beyond Meat growth narrative won’t fall flat anytime soon, shorts will rush to cover, and BYND stock will charge higher.
Percentage of Float Short: 13.8%
Arguably the most notable “short squeeze” stock on this list, Tesla is far from being done benefiting from short squeeze dynamics.
For years, Tesla has been a battleground stock with a heavy short interest. That heavy short interest helped provide firepower for what has been an epic rally in TSLA stock over the past year on successful Model 3 roll-out, China expansion, and Model Y and Cybertruck unveils.
Still, about 14% of Tesla’s float is sold short today. That’s pretty high for a company which is in the midst of breakneck growth with huge catalysts on the horizon.
Over the next few quarters, Tesla’s China growth narrative will catch fire, the Model Y will sell like crazy, and the company’s margins will improve dramatically. As all that happens, shorts will keep covering, and TSLA stock will keep powering higher.
Percentage of Float Short: 37.7%
One of the more controversial stocks on this list with big short squeeze potential is online home furnishings marketplace Wayfair.
With about 40% short interest, Wayfair is one of the most heavily shorted stocks in the market. That’s because, despite huge growth on its top-line, Wayfair has yet to turn profit. Bears don’t think the company ever will.
But that bear thesis misses the point of scalability.
That is, with scale, comes higher margins. Amazon also ran huge losses in its e-commerce business for a long time. Then, scale kicked, allowing the company to leverage fixed expenses and drive significant margin expansion. The same will be true for Wayfair. Inevitably, economies of scale will kick in, and the company’s huge revenue growth trajectory will spill over into big profit growth.
If/when it does, the shorts will have no option but to cover, causing a big shot squeeze in W stock.
Percentage of Float Short: 14.3%
Arguably the best stock to buy on this list of potential short squeeze candidates is Chegg, and that’s because the bear thesis on the digital education leader just doesn’t add up.
Chegg is a big-growth company, in a high-growth space, with huge and rising profit margins, a strong management team, muted competition, and a reasonable valuation. What is there not to like?
Over the next few quarters, Chegg will continue to leverage digitization tailwinds to transform its connected learning platform from niche to mainstream. Revenue growth will remain robust. Margins will keep expanding. Profits will keep roaring higher.
And the shorts will be forced to cover, adding more firepower to what is an already red hot CHGG stock.
Blue Apron (APRN)
Percentage of Float Short: 44.7%
One of the more heavily shorted stocks on this list — with the biggest potential upside — is meal-kit delivery company Blue Apron.
For the longest time, Blue Apron was simply known on Wall Street as a failed meal kit company that couldn’t concurrently grow customers and margins. But, the coronavirus pandemic has thrown this company a lifeboat, and sparked supercharged demand in meal kits as restaurants everywhere have closed.
Can Blue Apron turn this lifeboat into a big turnaround?
I think so. I imagine that of the hundreds of thousands of consumers who signed up for Blue Apron over the past few months, most will churn, but some will stick. If some stick, then Blue Apron’s revenue growth trajectory could turnaround. Indeed, everything will turn around. Margins will run higher. Net losses will narrow, and potentially even turn into profits.
If all that happens, the 45% of the float that is sold short will be forced to cover in bulk. That will add significant firepower to a potential second-half 2020 APRN stock rally.
Percentage of Float Short: 23.4%
Before the coronavirus pandemic, online insurance marketplace EverQuote was one of the hottest stocks on Wall Street. Then the pandemic struck, and EVER stock has been choppy ever since.
Bears believe this chop is the beginning of the end for EverQuote. They reason that the company’s growth potential is limited, and that the valuation is nonsense.
But this bear thesis is unnecessarily short-sighted.
Insurance companies spend a ton of money every year on advertising, distribution, and generating leads. EverQuote offers those insurance companies a smarter, data-driven, streamlined way to advertise, distribute, and generate leads. Yet, only a portion of insurance ad budgets are allocated towards EverQuote.
Over the next few years, EverQuote’s share of insurance ad budgets will grow by an order of magnitude. As it does, the company’s revenues and profits will roar higher. The stock will, too, supported by a ton of short covering.
Canopy Growth (CGC)
Percentage of Float Short: 18.1%
The whole cannabis sector appears to be up in flames in right now. Weak demand trends. Falling sales. Compressing margins. Widening losses.
Bears expect these trends to continue, and are therefore betting against the industry’s leader, Canopy Growth. About 20% of Canopy’s float is sold short.
But these trends won’t continue. Actually, in the back-half of 2020, they will reverse course in a big way.
Demand trends will perk up, thanks to more aggressive retail store openings in Canada and the launch of new edibles and vapes products. Sales will rise quickly on the back of reinvigorated demand. Margins will expand thanks to improving demand trends and curbed production among the industry’s biggest players. Expenses will fall thanks to cost-cutting across the whole industry. Net losses will narrow.
And pot stocks will charge higher, led by CGC stock.
Percentage of Float Short: 15.6%
Often labeled as the Tesla of China, Chinese premium electric-vehicle maker Nio also doubles as one of the most heavily shorted stocks in the market, with about 15% short interest.
The bear thesis is pretty straightforward. Throughout 2019, this company struggled to sell premium electric vehicles, because the premium electric vehicle in market in China is very small. These struggles will persist in 2020, and Nio will continue to burn cash at a rapid rate.
But this thesis is short-sighted.
Nio struggled to sell cars in 2019 because China cut EV subsidies and the whole auto market was under pressure from the U.S.-China trade war. China has since stopped cutting EV subsidies, the trade war has faded, and China’s auto market is projected to bounce back in late 2020 on tons of fiscal stimulus.
At the same time, Nio is launching new cars, and the entry of Tesla into the market is supercharging Chinese EV demand.
Connecting all the dots, then, Nio should sell a lot of cars over the next few months. As they do, the shorts will rush to cover, and NIO stock will fly higher.
% of Float Short: 13.0%
The bear thesis on social media and digital advertising company Snap caught momentum in early 2020 amid the coronavirus pandemic.
That bear thesis went something like this. Amid broad economic closures, consumer have stopped spending money. With consumers not spending money, there is very little reason for advertisers to keep spending money on digital ads. Consequently, many companies likely pulled back ad spend in March and April, which caused a significant deceleration in Snap’s growth trajectory.
That did happen. But it wasn’t as bad as feared.
Instead, Snap’s revenues rose 25% in March, and 15% in April. That’s pretty impressive growth against the cataclysmic coronavirus backdrop.
Even more impressive, before any of this happened, Snap was growing its revenues at a near 60% rate in January and February.
In other words, Snap will weather the coronavirus storm impressively, and get back to red-hot growth once all this passes — and it should pass, soon. As that happens, the bear thesis will fall apart. Short-sellers will cover. SNAP stock will rally.
% of Float Short: 67.9%
A whopping near 70% of Match’s float is sold short as investors clearly believe the online dating company is due for a big downturn.
But that won’t happen.
Through its portfolio of dating apps and platforms, Match has created a monopoly of sorts in the online dating world. That industry is only rising in usage and popularity as consumers increasingly digitize their experiences. Further, thanks to its dominant positioning in the secular growth online dating industry, Match operates at sky high margins, which will allow for big revenue growth to translate into big profit growth.
In other words, with Match, you have the leader in a growth market with muted competition and big margins. That’s a recipe of success, especially considering the valuation isn’t terribly stretched at 37-times forward earnings.
Over the next few quarters, the numbers at Match will remain strong, the shorts will remain wrong, a short squeeze will likely materialize, and MTCH stock will run higher.
% of Float Short: 39.8%
I understand the bear thesis on next-gen fashion company Revolve because I used to be one of the bears.
When the company came to market, Revolve was riding high on influencer culture tailwinds and advertising itself as the future of shopping for Millennial and Generation Z consumers. But influencer culture has lost popularity over the past few quarters, and with it, the Revolve growth narrative has lost steam.
RVLV stock has plunged. Bears expect more pain ahead.
But I don’t. The stock has already fallen hard. Now, the company is appropriately valued considering its decent growth prospects as another trendy, direct fashion brand.
Over the next few quarters, the company will report decent enough numbers to unwind the momentum short trade here. Short-sellers who were late to the trade will rush to cover, and spark a big short squeeze in RVLV stock.
% of Float Short: 41.7%
Catasys is a small, $350 million health-tech company leveraging big data to solve one of the health insurance world’s biggest problems: better managing the costs and outcomes of patients with behavioral health (BH) issues.
CATS stock has been on fire amid the coronavirus pandemic, on the idea that the number of BH issues has risen dramatically alongside social distancing measures, record numbers of lay-offs, and tons of doomsday talk from the media. Plenty of investors think that the Covid-19 bump in CATS stock will end soon. More than 40% of the float is sold short.
But I’m not sure this momentum will end anytime soon.
Catasys is much more than “just a coronavirus” play. This is a company which is leveraging big data, to solve big problems, and drive big savings, for big companies. After all, one of out five people every year deal with BH issues, and chronic illness patients who concurrently deal with BH issues cost health plans up to 4.5-times more than chronic illness patients who don’t deal with BH issues.
In other words, this is a big problem, and Catays is using big data to solve it. That positions the company for huge long-term growth. Huge long-term growth plus a massive short interest? Sounds like a recipe for success to me.
Tabula Rasa Healthcare (TRHC)
% of Float Short: 29.2%
Last on this of short squeeze stocks is another red-hot, big data healthcare company: Tabula Rasa Healthcare.
Over the past three years, TRHC stock is up more than 350% as the company’s big data solutions to reduce adverse drug events (or ADEs) have gained tremendous traction among major healthcare providers.
Some investors think this rally is overdone. About 30% of the float is sold short.
But this rally isn’t over done. If anything, it’s just getting started.
Every year, ADEs equate to huge human and financial loss. They are the third leading cause of death in the U.S. and cost the healthcare system up to $130 billion every year. Because this is such a large problem, Tabula estimates that its addressable market for big data solutions to reduce ADEs is somewhere around $10 billion.
The company did just $285 million in revenue last year. That’s less than 3% addressable market penetration, meaning there’s huge long-term growth potential here.
Yet again, then, we have a winning recipe of huge long-term growth potential and big short interest.
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 various other analysts and platforms, 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, he was long SFIX, PLUG, BYND, TSLA, CHGG, CGC, NIO and SNAP.