When an investor is bearish on a company, they can sell the stock short. And in order to sell a stock short, one must borrow the shares. As these positions accumulate, it’s measured via the short float. However, when a stock ignites higher, these can be some of the best stocks to buy.
Why? Because of what we refer to as a short squeeze.
You see, bears sell stock short for one reason, which is that they believe the share price should go lower. However, when the situation is better than expected, it’s not uncommon for these stocks to begin a sharp rally.
When a short-seller wants out of their position, the are forced to “buy to cover” — that is, a buy order to cover their short position.
It’s like when bulls need to exit, they sell.
However, when the stock is rallying sharply because of true buyers, adding these additional short-sellers’ buy orders to the mix only adds fuel to the fire. In turn, this can trigger what is referred to as a short squeeze and result in massive gains in a short period of time.
So, with all of that in mind, let’s look at seven of the best stocks to buy that are enjoying or could enjoy a real short squeeze:
- Bed Bath & Beyond (NASDAQ:BBBY)
- Stitch Fix (NASDAQ:SFIX)
- SunPower (NASDAQ:SPWR)
- American Airlines (NASDAQ:AAL)
- Virgin Galactic (NYSE:SPCE)
- Continental Resources (NYSE:CLR)
- Rite Aid (NYSE:RAD)
Now, let’s dive in and take a closer look at each one.
Stocks to Buy for a Short Squeeze: Bed Bath & Beyond (BBBY)
Retail has been a very difficult area to invest in for several years now. For many of those years, Bed Bath & Beyond was a toxic investment. The company spent billions on its buyback in what was ultimately a horrible, multi-year decision.
Given the painful realities of the novel coronavirus, Bed, Bath & Beyond and others were assumed to be fish in a barrel for short sellers. But that’s not what happened.
Under new leadership from CEO Mark Tritton, the company has been leveraging its omni-channel operations. It’s been maximizing its in-store utilization combined with online sales and curbside pickup.
As a result, the company continues to beat analysts’ expectations.
Most recently, Bed, Bath & Beyond reported earnings of 50 cents per share, crushed estimates as analysts were looking for a loss of 23 cents a share. Digital sales also rose 89%, while margins improved. Moreover, the company generated cash flow of more than $750 million and reduced its overall debt by about $500 million.
So, if bulls get a hold of this one, they could certainly kick off a strong short squeeze.
Stitch Fix (SFIX)
Stitch Fix has already begun a short squeeze of its own. It’s up 73% from Dec. 4, a day before it reported first-quarter earnings. And the stock rallied for 12-straight sessions as a result.
Obviously some readers are going to see that and think, “how can this be one of the best stocks to buy for a short squeeze?”
When the short float is high enough — in Stitch Fix’s case, it’s still around 37% at its last reading — these squeezes can take days or weeks to pan out. Admittedly, up 70% in just under a month and bulls may want to wait for the stock to cool off a bit.
As long as the shorts continue to dislike this name and as long as it continues to deliver strong results, short squeezes will remain possible.
Stocks to Buy for a Short Squeeze: SunPower (SPWR)
Overall, shares continue to trend higher with buyers constantly keeping a bid in the name. Another group that is exposed to periods of intense pessimism — solar stocks — the industry can have some of the best stocks to buy for short squeezes.
With an intense 51% short interest, SunPower has the potential to really squeeze higher. Following that post I referenced in the first paragraph, shares rallied as much as 19.8% that day.
Now near its prior all-time high, SPWR stock could be prone to another move to the upside.
With a market capitalization of $4.3 billion, it’s far from a micro cap. However, it’s still small enough for bulls to move if they step in with force.
American Airlines (AAL)
American Airlines has already shown why it can be one of the best stocks to buy for a short squeeze. From low to high, American Airlines stock climbed 120% in just five trading days in Q2.
That pop was helped fuel by true buyers who wanted to own the stock and short-sellers buying to cover their position. With a 32% short float, this stock is on the list of potential squeezes.
However, American Air is also an interesting name to keep an eye on because of the “reopening trade.” Simply put, airlines, casino stocks and other travel-related names are prone to big pops when tied to the coronavirus.
When cases start to die down, positive talk about the vaccines pick up or travel trends increase, American Air and its peers quickly come back in favor. For American Airlines to work as a short-squeeze candidate, one of these three catalysts (and preferably more than one) needs to be sustainable.
That could very well kickstart a massive rally in this group, even though it has already shown life lately.
Stocks to Buy for a Short Squeeze: Virgin Galactic (SPCE)
Like American Air, Virgin Galactic stock has also shown investors why it can be one of the best stocks to buy when it comes to short squeezes. Pull up a chart that shows the beginning of 2020 before the coronavirus hit.
Shares went from about $7 in December 2019 to more than $40 per share two months later. That was a six-fold increase in the stock from the low to the high.
Amid that rally, the stock rallied in 10 out of 11 weeks. Even the one “down week” in that run resulted in a weekly loss of just 0.35%. So of all the stocks on this list, Virgin Galactic goes to show just how powerful and how much longevity some of these moves can be.
Collectively, Virgin Galactic is a great speculative stock for investors betting on space travel and high-speed technologies. And while the stock is out of favor now, once it finds its footing, it could setup for a potent move to the upside.
Continental Resources (CLR)
Travel stocks and energy names have had a rough 2020. And while energy doesn’t get the headlines that some of the more popular names do, could these dogs have a big move in 2021?
That said, Continental Resources is one such consideration if that’s the case.
For the year, shares are still down more than 50%. However, there has been some life lately. The stock continues to run into resistance in the $19.50 area, but has put in a higher low. In other words, it is trending higher, just looking for a break over resistance.
That doesn’t mean we’ll get it. But should shares break out, it could force sellers to buy back their short positions. Like American Air, Continental Resources and other energy names are a play on an economic rebound.
When the economy comes back to life, so will demand for energy. And when demand comes back for energy, it should send this sector high. It’s one of the only groups that have not had a sustainable recovery.
In fact, over the past year, energy is down 37%. The next worst sector performance? Real estate, down just 6.2%.
Stocks to Buy for a Short Squeeze: Rite Aid (RAD)
Does Rite Aid have enough catalysts to trigger a short squeeze? That much isn’t clear at the moment. However, we saw its potential just this month.
Let’s back it up a bit though and go back to December 2019. This was before we entered our new world of Covid-19. At the time, Rite Aid was just a small pharmacy player being squeezed by its competition and the looming entrance of Amazon (NASDAQ:AMZN).
Following a reverse split — which is never good — Rite Aid shocked investors when it reported earnings. Shares went from $7.50 the day ahead of earnings to a high of $23.88 after seven consecutive days of rallying.
However, that marked the stock’s 52-week high for a year. When Rite Aid reported earnings on Dec. 17, 2020, the stock again looked like it was about to run, climbing 31.5% at its highs.
In the release, Rite Aid reported Q3 earnings of 8 cents per share, crushing estimates by 58 cents. Revenue of $6.12 billion came in ahead of expectations by more than $275 million. However, full-year guidance came in way ahead of consensus estimates.
Because of the guidance and the 21% short interest, it’s possible Rite Aid could be a short-squeeze candidate should buyers start to gobble it up. Thus, keep it on your radar.
On the date of publication, Bret Kenwell did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.