Reddit stocks continue to show that unprecedented behavior in the markets is quickly becoming the new normal. Redditors continue to seek heavily shorted stocks in order to profit sharply by enacting a short squeeze.
Since retail investors are actively seeking short-squeeze plays, there are some indicators to look for to identify them. There are three conditions that must be met in order for a short squeeze to be identified. First, the number of shares that are short should be five times or greater the average daily volume. Second, the amount of short shares as a percentage of float should exceed 10%. Third, the number of shares that are short should be increasing.
I am not sure if r/WallStreetBets traders are keenly tracking all of these factors while they await the next short squeeze. Nevertheless, those are the parameters that precede such a situation.
Here are seven Reddit stocks waiting for a short squeeze:
- Discovery Inc. Series B (NASDAQ:DISCB)
- Timber Pharmaceuticals (NYSEAMERICAN:TMBR)
- Riot Blockchain (NASDAQ:RIOT)
- 180 Life Sciences (NASDAQ:ATNF)
- Bonanza Creek Energy (NYSE:BCEI)
- HighPoint Resources (NYSE:HPR)
- Sundial Growers (NASDAQ:SNDL)
- Ontrak Inc. (NASDAQ:OTRK)
Reddit Stocks: Discovery Inc. Series B (DISCB)
DISCB stock is the latest equity to get pulled into the short squeeze WallStreetBets world. Discovery’s Class B shares surged up in volume last Wednesday. The shares which usually see daily volume of roughly 10,000 shares, were exchanged approximately 600,000 times before noon Wednesday. As a result DISCB shares soared from $54 on March 29, to nearly $150 on the afternoon of March 31.
The volatility left many scratching their heads. InvestorPlace’s Chris MacDonald explained the underlying mechanism thusly: “The thesis? Because Discovery’s Class A shares were the ones block traded due to the Archegos Capital Management margin call-related liquidation, and these shares are much more liquid and trade in higher volumes, the company’s Class B shares were a better short-squeeze target.”
Like GameStop (NYSE:GME), DISCB shares have come down quickly following the spike in action. Discovery’s B shares are now trading at $89. Interestingly, Gamestop shares saw a second spike 20 days after the initial action. Social media retail investors are likely speculating if such a pattern could hold true for Discovery.
It must be noted, however, that all of this unprecedented action is likely to bring increased scrutiny and possible regulations. Per The Wall Street Journal: “The steep losses at Archegos come as a council of top U.S. regulators known as the Financial Stability Oversight Council is already scheduled to meet on Wednesday to discuss hedge-fund activity during the pandemic-triggered crisis.”
Timber Pharmaceuticals (TMBR)
Timber Pharmaceuticals is a biotech company focused on developing therapeutics for dermatologic diseases. Like all of the following stocks on this list, TMBR has short shares as a percentage of float in excess of 10%. In fact, according to finviz, the number is currently at a staggering 59% of float being sold short.
Timber Pharmaceuticals is doing what many small, focused biopharmaceuticals do. That is, the company is trying to solve the unmet needs of patients who have rare diseases without approved therapies. Timber Pharmaceuticals is keyed in on dermatological diseases including Congenital Ichthyosis, Tuberous Sclerosis complex, and Localized Scleroderma.
Its pipeline of five drugs is in various stages of clinical trials with none yet beyond stage 3. Another way of stating this is that Timber Pharmaceuticals doesn’t have any FDA approved treatments currently.
The company is in a similar financial position to many other small biotechs awaiting FDA approval. Its revenues are very low and the company is seeking to contain costs. It recorded 2020 revenues of $500,000 which were entirely attributable to a UFDA grant for the development of one of its orphan drugs. The company maintained a cash position of $10.4 million at the end of 2020.
It also looks like the percentage of float is increasing which is another technical sign for identifying an impending short squeeze.
Riot Blockchain (RIOT)
Riot Blockchain is also above the 10% of float sold short threshold, currently sitting at 12.4%. The shares sold short is also rising. These technical signals indicate that it too is another Reddit stock waiting for a short squeeze.
The company is a Bitcoin mining firm. Not to be overly judgmental, but this seems like exactly the kind of target for Redditors. Bitcoin mining is a very volatile sector and it is definitely one to be careful of for reasons other than its inherent volatility.
I’ve written about Riot Blockchain before. I was adamant at that time that I don’t recommend buying RIOT stock. I remain adamant that investors still shouldn’t. However, as I mentioned a few paragraphs back, the technical signs setting up a short squeeze are in place.
My opinion aside, there are reasons that some readers may consider investing in Riot Blockchain. According to the company’s recent fourth-quarter and full-year results, there are positive signs. The company achieved profitability on a GAAP basis in Q4. It never achieved that hallmark in Q3 or Q4 of 2019. Mining revenues also increased 116% on a quarter-over-quarter basis from $2.4 million to $5.2 million year-over-year in Q4 of 2020.
180 Life Sciences (ATNF)
180 Life Sciences is a company developing therapeutics for inflammatory diseases and therapeutics against inflammation itself. Before jumping into the company and what it does, let’s address some of the short squeeze indicators. Indeed, a short squeeze is possible based on its massive short float percentage of 65%, according to finviz. The percentage of short float has also risen in the past two weeks. Redditors and other social media retail investors surely have it on their radars.
The company has three distinct programs pursuing the development and commercialization of drugs for separate inflammatory diseases. Each of the three programs is distinct and geographically disparate.
Oxford University operates the first program, which has a focus on anti-TNF (Tumor Necrosis Factor) and fibrosis. The second program is developing synthetic CBD analogs from the University of Jerusalem and Oxford University jointly. And the third program is located at Stanford University and aims to treat ulcerative colitis in former smokers.
The company is not yet in a stage of profitability, but I don’t believe those seeking a short squeeze care much about that.
Bonanza Creek Energy (BCEI)
Bonanza Creek Energy is an oil extraction company operating out of Denver, Colorado. The company recently completed a merger with HighPoint Resources (HPR), which was often a topic of discussion on various Reddit boards. Before the merger, HighPoint’s short sale float percentage was 32%.
The merger was announced on April 1 but the markets didn’t react much as shares stayed mostly flat. HPR shares were redeemable for BCEI shares at a ratio of 1 HPR share to .114 BCEI shares.
There is a chance that Redditors will shift their focus over to BCEI shares once the dust settles around the merger. That’s because like HighPoint was, BCEI stock is heavily shorted at 13%. The percentage of short interest has also risen over the past two weeks.
Perhaps the HighPoint merger will serve to increase the short float percentage because more-heavily shorted HPR shares are being absorbed into BCEI shares. It could be an interesting development to keep your eyes on.
Sundial Growers (SNDL)
Sundial Growers has been trending mostly down since spiking over 350% in early February. Although it has been relatively flat while trending downward since, there is reason to believe it could get squeezed again.
SNDL stock remains 10% sold short at present. Right now the short sale percentage is decreasing though, which indicates that a short squeeze may not occur. Though that is a technical identifier for a short squeeze, it still could happen. Reddit provides a volatility that can’t be measured, and an unforeseen catalyst could kick things off again.
Part of the reason Redditors were high on Sundial Growers earlier is that cannabis may soon be legalized at the federal level. Although President Joseph Biden has wavered on the subject, the calls for legalization continue. Senate Majority Leader Chuck Schumer continues to push hard for passage of the repeal bill he introduced in 2018.
Sundial Growers is a low-priced cannabis stock out of Canada. The overarching thought was that a federal repeal in the U.S. would open new possibilities for Canadian companies like Sundial. While that argument has its merits, Sundial Growers was and remains a poorly run company.
Ontrak Inc. (OTRK)
Ontrak Inc. is sold short in the extreme. Currently, 38% of its shares are sold short. That’s up 16% from two weeks ago, and solidifies the argument that a short squeeze could be on the way.
The big reason that investors are so bearish on OTRK stock is that it announced that it had lost its biggest customer. OTRK stock had been moving upward for the entirety of 2020. The AI data platform used by healthcare companies for tracking patient behavioral health outcomes was on a growth path.
But then it announced that its biggest customer – a healthcare plan provider – would step away in 2021. The aftermath is that Ontrak will see only 20.7% YoY growth instead of nearly 100% YoY growth. Unfortunately for Ontrak, markets reacted in kind.
That puts OTRK stock in the crosshairs of Reddit’s retail investors as short interest is rising from already high levels.
Yet, there are encouraging signs that Ontrak may not continue its march southward. On April 1, Ontrak signed a contract with LifeStance Health, a large national provider of outpatient mental healthcare. There was no mention of potential effects on revenue growth, but the partnership certainly gives Ontrak positive momentum.
On the date of publication, Alex Sirois did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Alex Sirois is a freelance contributor to InvestorPlace whose personal stock investing style is focused on long-term, buy-and-hold, wealth-building stock picks. Having worked in several industries from e-commerce to translation to education and utilizing his MBA from George Washington University, he brings a diverse set of skills through which he filters his writing.