The Reddit army of intraday traders seem to be changing the rules of the game. Targeting the heavily shorted stocks is one of the top trading strategies of the Reddit army.
A Bloomberg article points out that “there are dozens of ways to pick stocks, but few have been as unconventional – or as successful – as the coordinated short squeeze being deployed by Reddit’s army of day traders.”
It all started with GameStop (NYSE:GME). It’s estimated that short-sellers lost over $5 billion in betting against GME stock. Of course, the Reddit army short squeeze was the culprit.
With these events, heavily shorted stocks have been in the radar. This column will talk about three stocks with high short interest and the possible direction in which these stocks are likely to move.
Let’s take a look at these heavily shorted stocks.
Heavily Shorted Stocks: Blink Charging (BLNK)
BLNK stock is among the most heavily shorted stocks with 37.2% of float shorted.
Recently, President Joe Biden announced a plan to build a national electric vehicle charging system. This is a part of the $2 trillion infrastructure investment plan. ChargePoint Holdings (NYSE:CHPT) surged significantly on this news. However, gains for BLNK were relatively muted.
BLNK stock surged by over 2,400% in the last year. Stretched valuation is a key reason for the name being among the heavily shorted stocks. To put things into perspective, Blink Charging reported revenue of $6.2 million in fiscal year 2020. On a year-on-year basis, revenue growth was 121%.
The stock however trades at a market capitalization of $1.7 billion. This is nearly 275x 2020 revenue. Clearly, the stock seems overvalued and it’s not surprising that the short interest has seen heavy buildup.
Having said that, BLNK stock is worth considering on corrections. The electric vehicle charging industry is likely to growth at a healthy pace in the next decade. The stock price might have run ahead of fundamentals, but strong top-line growth will sustain.
Overall, BLNK stock looks ripe for a significant correction.
Workhorse Group (WKHS)
From an all-time high of $42.96, WKHS stock has corrected all the way down to $13.40 However, the short interest remains high with 25.5% of free float shorted.
WKHS stock plunged when the U.S. Postal Service announced a multi-billion-dollar delivery fleet modernization contract in favor of Oshkosh Corporation (NYSE:OSK). There might be some hope for Workhorse with lawmakers planning to examine the contract award.
If there is positive new on that front, short covering can trigger a strong rally for the stock. Recently, The ARK Autonomous Technology & Robotics ETF (BATS:ARKQ) purchased 59,600 shares of Workhorse. In all probability, this bet is on the hope that Workhorse might still stand a change with the Postal Service contract.
However, leaving this contract aside, there already seems to be significant competition in the commercial electric vehicle segment. Investors might find better investment opportunities. As an example, Arrival (NASDAQ:ARVL) has a $1.2 billion contract backlog from United Parcel Service (NYSE:UPS). ARVL stock looks attractive at $16.
Overall, WKHS stock also has a strong fundamental reason to be among the heavily shorted stocks. If Oshkosh is successful is retaining the contract, participants with short interest stand to gain meaningfully.
PUBM stock is also in the list of heavily shorted stocks with 40.2% of float shorted. The stock is up 98% so far in 2021. A forward price-earnings ratio of 277x might explain the heavy short interest in the stock.
PubMatic is a provider of cloud infrastructure platform that enables programmatic advertising transactions. For the fourth quarter of 2020, the company reported strong top-line growth of 64%. Adjusted EBITDA growth for the same period was 190%.
However, for 2020, the company reported revenue growth of 31% to $148.7 million. For a stock trading at a forward P/E of 277x, top-line growth of 31% is unimpressive. Furthermore, PubMatic has guided for revenue growth of 22.5% (mid-range) in 2021 on a year-over-year basis.
Clearly, the stock seems to be way ahead of fundamentals. Since the company’s business model looks attractive, the significant short interest is largely on account of valuation concerns.
PUBM does not seem like a stock that’s likely to see a short squeeze in the foreseeable future. The stock is however worth keeping in the investment radar. With an asset-light model, the company is positioned for strong cash flows in the next few years.
On the date of publication, Faisal Humayun did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modeling. Faisal has authored over 1,500 stock specific articles with focus on the technology, energy and commodities sector.