Among the oddest developments of the new normal is the rise of the rookie day trader. With the pandemic forcing millions of people to work from home, suddenly, everyday worker bees found plenty of time on their hands. Rather than wasting the hours on their daily commute and back, cubicle warriors found that they could invest for sizable profits. Sure enough, interest has now filtered into short squeeze stocks.
That escalated quickly. Usually, newbie investors learn the ropes through bread-and-butter trades before speculating on some of the more exotic tactics. But amid the present environment, self-help gurus on various social media platforms saw an opportunity and took it. Again, with millions having extra time on their hands, they could watch videos or browse investment-related posts — without fear of the boss lurking over their shoulder. Hence, the rise of short squeeze stocks.
But what exactly is that term? To understand short squeeze stocks, we must first appreciate the unlimited risk of traders going short a stock — essentially, taking a negative bet that an underlying equity unit will decline in value. Bearish traders accomplish this by borrowing securities, then immediately selling them in anticipation that they will drop. If they do, these folks buy back the securities, return the borrowed portion and pocket the rest as profit.
Sounds simple enough, until you realize that if the underlying security rises in value, the bearish trader is still contractually obligated to return the borrowed shares. Since there’s no limit to how high a stock can go, bears caught off guard are incentivized to cut their losses by buying back the shorted securities. Of course, this creates upward pressure for the target investment — exactly why speculating contrarians love short squeeze stocks.
Of course, this tactic has always been risky. But the pandemic created a new wrinkle. Thanks to the ability of corralling the troops on social media, bearish traders have an added risk factor to consider. Theoretically, this might swing the odds in favor of those who are gambling on potential short squeeze stocks, such as these speculative ideas.
- MediaCo (NASDAQ:MDIA)
- Origin Agritech (NASDAQ:SEED)
- Support.com (NASDAQ:SPRT)
- Exela Technologies (NASDAQ:XELA)
- Piedmont Lithium (NASDAQ:PLL)
- GoodRx (NASDAQ:GDRX)
- Tattooed Chef (NASDAQ:TTCF)
While the concept of short squeeze sounds exciting, I cannot emphasize this enough: just because a majority of traders are bearish on an equity unit does not mean it will rise in value. Sometimes, short squeeze candidates simply keep falling down, just like the bears wish. Remember, everything that you do in the market carries risk, so always perform due diligence before engaging in any trading tactic.
Short Squeeze Stocks: MediaCo (MDIA)
Popular among the social media crowd and professional traders, MediaCo came to my attention thanks to Fintel.io, billed as a provider of advanced research tools for data-driven investors. Checking the stats for myself, on the surface, MDIA seems to meet the key criteria of short squeeze stocks; namely, the short percentage of float (the number of shares available for trading in the market) is almost 26%.
As a general rule of thumb, any short percentage of float metric that’s in double-digit territory is a red flag. Such a high figure implies that bears are in control and are seeking to push the price down. Naturally, this wouldn’t bode well for MDIA stock.
However, because short squeeze stocks are one of the latest phenomenon to hit Wall Street, it’s not out of the question for MediaCo to suddenly rise. As a radio broadcasting media firm, its main job is to acquire and operate radio stations. The problem, as the bears probably see it, is that the radio broadcasting industry is irrelevant.
Still, a possible return to normal — as in bringing workers back to their cubicles — could swing relevance back into MDIA. Therefore, I see this as one of the potential short squeeze stocks based on the narrative.
Origin Agritech (SEED)
Origin Agritech is another idea for short squeeze stocks that Fintel materialized from its trading algorithm, I’ve personally never heard of the company. Looking into its core statistics, SEED stock has a short percent of float of 11.3%. As I mentioned earlier, anything in double digits is a reason for further investigation. You don’t want to jump on a contrarian tactic just because one metric pings in your favor.
Looking at the company’s financials, I can see why the bears have decided to short SEED stock. In its fiscal year 2020 (ended Sept. 30), Origin Agritech generated $7.71 million, which is a pretty meager baseline all things considered. Aside from that, the sales tally was down nearly 41% from the prior year’s result.
Also, its fiscal first quarter of 2021 report wasn’t great, posting sales of $1.8 million. In sharp contrast, the year-ago quarter saw sales of $12.2 million.
As a Chinese agricultural biotechnology firm specializing in crop seed breeding and genetic improvement, let’s just say that on multiple fronts, SEED generates controversy. Still, agriculture is a critical infrastructure play so there might be upside here — just be extremely careful here.
Short Squeeze Stocks: Support.com (SPRT)
A technical support company, Support.com offers significant implications for the new normal. As it implies on its website, global enterprises, major domestic businesses, professional services firms and consumers need effective technical support solutions. Further, with so many folks working remotely, decision-makers can’t afford to be incumbered with unnecessary delays or problems.
That sounds good and all but apparently, many day traders don’t see it that way. SPRT stock features a blisteringly high short percent of float of 62% at time of writing. Further, the short ratio or days to cover is 3.1, which isn’t that high but still enough to raise eyebrows, particularly because of the ratio of shares held bearishly, so to speak.
Given the ridiculous magnitude of bearishness, is SPRT one of the short squeeze stocks to advantage to the upside? Well, traders became pessimistic about Support.com likely because of its financial performance. Its 2020 sales were down nearly 31% from 2019, while Q1 2021 sales were also down on a year-over-year basis.
However, the bulls might be banking on a return to normal, which might benefit Support.com’s core businesses. Also, SPRT enjoys serious positive momentum so this is one to watch closely.
Exela Technologies (XELA)
As one of the top experts in the business process automation industry, Exela Technologies levers tremendous relevance. Thanks to its ability to foster frictionless communication between systems, upgrade inefficient processes and provide enterprise-level clients with critical insights, it’s no surprise that Exela has over 4,000 corporate clients in more than 50 countries.
So, why has XELA stock attracted the bears? First, the company doesn’t enjoy a particularly positive backdrop, with the pandemic causing many of its clients to reduce costs, which in turn hurts Exela’s business. Second, day traders are skeptical about the firm’s financial performance. In 2020, revenue dropped more than 17% and in Q1 2021, top-line sales declined both on a sequential basis (against Q4 2020) and on a YOY basis.
Naturally, bearish speculators have really taken XELA to task, as evidenced by a short percent of float that’s rising close to 24%. However, such a high short interest also attracts those seeking to advantage short squeeze stocks.
The thing about XELA is that a return to the office could open more opportunities for the business process automation firm. Therefore, if you can stomach the risk, there might be something here.
Short Squeeze Stocks: Piedmont Lithium (PLL)
Based strictly on the numbers, Piedmont Lithium doesn’t necessarily scream at you as if it’s among the short squeeze stocks. With a short percent of float of just under 6%, it’s a conspicuous number, to be sure. But it’s not quite the double-digit threshold that I mentioned, though that’s not an established rule.
So, what makes PLL stock worth considering for contrarian speculators? Heading into the first complete weekend of August, Piedmont shares fund themselves down over 12% against the trailing-month period. That’s quite remarkable considering the relevance of its underlying product. What gives then?
One major headwind is the growing debate between powering technological innovations and protecting our environment. As Reuters reported recently, commissioners in Gaston County, North Carolina “imposed a 60-day mining moratorium … giving officials time to rework local regulations before” Piedmont can apply for a necessary zoning variance.
It’s difficult not to sympathize with locals, who fear that lithium mining operations “could taint groundwater supplies and cause light and noise pollution, among other concerns.” At the same time, the “mine would become one of the largest U.S. sources of lithium for electric vehicle batteries.” I think this narrative will ultimately win over, making PLL a speculative buy among short squeeze stocks.
A healthcare company operating as a telehealth platform, GoodRx fortuitously found itself plying its trade in one of the most relevant sectors. Following the initial breach of the novel coronavirus, contactless services — particularly health-related services — commanded a significant premium. So, why did GDRX stock tumble nearly 44% over the trailing six months?
Judging from the company’s financials, the answer isn’t clear. In 2020, the company generated revenue of $550.7 million, up almost 42% from the prior year. In Q1 of this year, GoodRx rang up $160.4 million, up sequentially 4.5% and a lift of 20% against Q1 2020 results.
While these are encouraging stats, the telehealth sector has experienced significant declines since early this year when Covid-19 cases hit a peak and then faded due to the vaccination rollout. Some of that bearish sentiment has likely affected GDRX. But does it deserve a short percent of float of 25%?
That might seem a bit steep considering that contactless healthcare services could be in vogue following the pandemic. And with new variants wreaking havoc, GDRX has a shot of temporarily being one of the short squeeze stocks to advantage.
Short Squeeze Stocks: Tattooed Chef (TTCF)
A plant-based foods specialist, Tattooed Chef was already competing in a burgeoning industry well before the pandemic. But following the public health crisis, the company’s underlying business became all the more pertinent. That’s because food supply chain disruptions hit the meat industry hard, leading to shortages and higher prices. In turn, Tattooed Chef filled a void.
Soon, consumers started asking themselves if the fuss over animal-based proteins was worth it. Besides, going with a plant-based alternative would be better for the environment. Therefore, TTCF stock enjoyed much anticipation regarding its initial public offering.
However, it has been a choppy ride. Part of that likely has to do with day traders anticipating a return to normal. If so, that would mean meat consumption would return to normal levels. Therefore, TTCF features a high short percent of float of 25%, and a relatively high short ratio (days to cover) of nearly 7x.
But could this be one of the better opportunities among short squeeze stocks? It’s possible given that the company is posting solid financial results on a YOY comparison. Plus, TTCF’s technical posture suggests a big move upward is coming. Definitely, Tattooed Chef is one to watch.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.