Bulls, bears but not pigs. The advice was certainly useful in a circus-like spectacle involving some of Wall Street’s most heavily shorted stocks. But not all shorted stocks are the same. Based on today’s evidence both off and on the price chart, three of these battleground plays look well-positioned for bulls to prosper.
First, let’s address the main company that’ll come to mind these days whenever a discussion of heavily shorted stocks comes into play.
That’s right — we’re talking about “Gamestonk!!” The now infamous and incorrectly hyped recognition of GameStop (NYSE:GME) by Tesla’s (NASDAQ:TSLA) front man Elon Musk was part of the market’s fascination with the over-the-top rise and spectacular fall of the brick-and-mortar video game retailer. And rightly so.
The story of Main Street’s proverbial David using the Reddit forum r/wallstreetbets to wage a long stock campaign against wealthy and sophisticated hedge funds shorting GME had all the elements great theater. And as shares soared from $43 to nearly $500 and back down to about $50 in 10 trading days, the show was in fact a spectacle. It’s also true the actual price of admission for a ride up and down in GME stock likely proved catastrophic for many bulls and bears alike. Enough said.
But not all heavily shorted stocks are flash in the pan events or deserve to have bears betting against them. Amazon (NASDAQ:AMZN). Netflix (NASDAQ:NFLX). Those two phenomenally successful companies whose shares have made fortunes for their investors were at one time highly contested. They were also heavily shorted stocks with many investors betting against their businesses’ ability to survive. Of course, they were wrong. Dead wrong.
Over the last couple of years, TSLA enjoyed the dubious honor of being the market’s most heavily shorted stock by dollar value. And it happened as shares soared and Tesla’s valuation ballooned from a fraction of competitors like Ford Motors (NYSE:F) and General Motors (NYSE:GM) to dwarfing those auto manufacturers’ valuations multiple times over. Doink!
Given the history of bullish outcomes for some heavily shorted stocks, let’s look at three that the so-called “smart money” might be wrong about:
Heavily Shorted Stocks to Buy: Workhorse Group (WKHS)
Source: Charts by TradingView
The first of our heavily shorted stocks to buy is Workhorse Group. The EV commercial van upstart maintains short interest of about 23%. Exposure to WKHS stock stands to be a make-or-break situation. Bulls and bears are betting on (and against) a U.S. Postal Service contract order worth an estimated $6 billion, as well as brand name awareness and profitability sure to follow.
Workhorse is one of three finalists for this coveted deal. But as InvestorPlace’s Louis Navellier notes, WKHS is the only candidate looking to fill the government order of 180,000 delivery vans with electric vehicles. And given the Biden administration’s aggressive push into renewables, this heavily shorted stock’s chances to win this horse race looks increasingly likely.
Technically, this heavily shorted stock has broken out of a monthly triangle and already enjoyed a significant rally out of the pattern. However, a bullish stochastics crossover that’s just signaled and a conservative measured move both look to support an even larger reaction towards $55 – $60 if the deal is sealed.
Favored Strategy: July $45/$60 Bull Call Spread.
Source: Charts by TradingView
Bears aren’t subscribing to FUBO’s story as the stock maintains short interest of 23%. But amid frozen vacations, lockdowns and various other social restrictions, FUBO’s streaming live sports platform has become an essential service for many individuals.
Most recently, in January, the company issued preliminary Q4 guidance showing accelerating and enviable high double-digit subscriber and sales growth. Once Covid-19 is fully in the rearview mirror, don’t expect subscribers to simply suspend or cancel that relationship. A pair of acquisitions will allow sports book operations to begin later this year, which stands to position FUBO as a longer-term champion investment for bulls.
Technically, shares of this heavily shorted stock have been pulling back the last couple weeks. But the weakness appears to be part of a countertrend opportunity within the right side of FUBO’s larger cup-shaped correction as shares trade near the 50% Fibonacci or midfield line.
Favored Strategy: March $40/$65 Collar.
Source: Charts by TradingView
Not that I’ve saved the best for last, but GameStop is the third and final buy for today. Short interest has tumbled from more than 1.4x the stock’s float during GME’s explosive rally to a still extremely high 41%, which keeps shares in the top spot among heavily shorted stocks.
Don’t expect a move towards $500 anytime soon or even ever again for that matter. But GME stock may have some muscle to get back up after a crushing blow endured by bulls over the past two weeks. And that could still offer huge profit potential.
Unlike the past couple years where bankruptcy looked guaranteed, GameStop has made a bit of a comeback. GameStop actually enjoyed sales of around $5.2 billion through October 2020. Compared to a valuation of about $4 billion and a market with its share of much more outlandish high-flying price-to-sales multiple stocks, there is an argument to be made for going long this heavily shorted stock. That view is also helped by today’s price chart … well to a certain extent at least.
Technically, GME’s massive implosion has just now confirmed a daily chart pivot low. It’s the second such candlestick signal since topping on Jan. 28. I like second chances and comebacks. But relying on a collar strategy rather than today’s fundamentals or price chart as the basis for a guaranteed next chapter makes a great deal of sense.
Favored Strategy: March $40/$100 Collar.
On the date of publication, Chris Tyler holds, directly or indirectly, positions in Ford Motors (F) but no other securities mentioned in this article.
Chris Tyler is a former floor-based, derivatives market maker on the American and Pacific exchanges. The information offered is based on his professional experience but strictly intended for educational purposes only. Any use of this information is 100% the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT and StockTwits.