For most lay participants in the markets, the equities sector represents a one-way street. Banking on the upward bias of U.S.-based blue chips, almost every financial advisor recommends a buy-and-hold strategy for those who have retirement accounts. While such an approach has proven viable, it also raises a key question among participants because equities also move in the other direction. This brings up the discussion about short-interest stocks.
By definition, short-interest stocks are equity units which are held short; that is, traders are taking a negative bet against the shares in question, profiting when they go down in value. A short position starts when a trader borrows securities from a broker, who then immediately sells them. The idea is to hope those shares drop in price so that the trader can acquire them to fulfill the loan obligation, thus taking the leftover amount as profit.
While an intriguing concept, heavily shorted securities can bounce higher from bullish investors seeking a discounted opportunity. When that happens, bearish traders must cover their positions; otherwise, an equity unit has no upside price limit so the obligation for the bears is theoretically unlimited. Such panicked covering results in a short squeeze, which explains the meme trade phenomenon. Hence, gambling on short-interest stocks can be lucrative.
And thanks to the meme-ing that has taken over Wall Street, the new generation of traders are scouring reports on short interest ratios, or the total number of shares of particular companies that are held short (as in not yet covered or closed out). But simply buying short-interest stocks is a risky approach. If it were that easy to gain riches in the market, everyone would be doing it.
If you’re going to wager on securities that are beaten down badly, you want to make sure what the reason for the negativity is. Sometimes, shares are terrible performers because they’ve “earned” the red ink. Here are short-interest stocks that you may want to perform an extra round of due diligence on before proceeding.
- Greenidge Generation (NASDAQ:GREE)
- Workhorse Group (NASDAQ:WKHS)
- Acrimoto (NASDAQ:FUV)
- Lordstown Motors (NASDAQ:RIDE)
- Intercept Pharmaceuticals (NASDAQ:ICPT)
- SmileDirectClub (NASDAQ:SDC)
- iRobot (NASDAQ:IRBT)
Treat the list below not as a discouragement against betting on short-interest stocks but rather as an encouragement to check under the hood. For instance, if you’ve got your heart set on a used car, wouldn’t you want to do a comprehensive vehicle history report before inking a document with a slimy salesperson? It’s the same concept here.
Short-Interest Stocks: Greenidge Generation (GREE)
Although the meme-trade phenomenon produced massive gains early on for certain investments, it’s important to realize that no guarantees exist in the market. True, the idea of gambling on short-interest stocks with coordinated fervor on social media caught the vanguard of Wall Street hedge funds with their pants down. The little guy won and that’s something to be celebrated.
But as the fiasco surrounding Greenidge Generation proves, just because you buy short-interest stocks doesn’t mean that other bulls will follow you in the trade. As you’ve probably heard, Greenidge Generation, a vertically integrated cryptocurrency mining and power generation company, closed its previously announced merger with Support.com, a customer and technical support solutions provider.
To be fair, Support.com shares did blast higher shortly after I wrote about it on Aug. 12 of this year. But after peaking at a closing price over $316, the newly minted GREE shares suffered a catastrophic failure. If you’re thinking that the merger could produce some upward gains, I’d cautiously warn against the idea.
In short, cryptos are highly volatile and there’s a very real possibility that the sector could incur a long dark winter. If so, you’d be overpaying for GREE stock.
Workhorse Group (WKHS)
Personally, Workhorse Group is an intriguing case among short-interest stocks that seemingly offer upside but are likely instead bull traps. It’s interesting to me because over the years, I’ve attracted criticism that my work is nothing more than groupthink.
Turns out, the Oxford dictionary defines groupthink as the “practice of thinking or making decisions as a group in a way that discourages creativity or individual responsibility.” I’ve been accused of many things in life but lacking creativity or shunning responsibility has never come up.
Anyways, I was one of few voices that went against the groupthink model that Workhorse was virtually guaranteed to win the U.S. Postal Service contract for replacing its aging mail carriers on the basis that Workhorse offered the only full electric solution. You can review that article to see why I don’t think it’s wise to bet too strongly on the speculative venture.
Recently, Workhorse also dropped its legal challenge against the USPS, with CEO Rick Dauch stating that he believes the “best way for us to work with any governmental agency is through cooperation, not through litigation.” Well, that ship may have already sailed.
Short-Interest Stocks: Acrimoto (FUV)
With both social and political sentiment aligned toward clean energy solutions, electric vehicle manufacturers like Acrimoto offer fundamental pertinence. As well, the company isn’t competing with the ultra-competitive full-size EV manufacturers, where the underlying industry will soon welcome a wave of legacy automakers’ electric-powered models.
Instead, Acrimoto competes in a niche market of extremely compact passenger and delivery vehicles. On the surface, the idea makes plenty of sense, with modern personal mobility solutions valuing space-efficient solutions. But the problem is that the company isn’t generating the results that it needs for long-term survival.
For instance, on a percentage-basis, Acrimoto posted year-over-year revenue growth of 167% in the second quarter of 2021. But the problem was two-fold: first, the nominal sales only amounted to $720,000 and second, the operating income was a loss of over $9 million. The company’s not even making money on a gross profit basis, which is problematic.
Sure, FUV is one of the most bearish short-interest stocks with almost 37% of the float held short. But that’s not enough of a comforting catalyst for anyone who isn’t a stare-death-in-the-face gambler.
Lordstown Motors (RIDE)
Following the theme of EV-related short-interest stocks, Lordstown Motors was once one of the most-discussed investment opportunities in the next-generation transportation sector. Today, it seems like hardly anyone mentions it except to heap on the brewing negatives regarding the organization.
To quickly recap, Lordstown first generated buzz for its all-electric commercial pickup trucks. A particularly fascinating innovation was the company’s in-wheel drive system which facilitated additional storage capacity and apparently better performance metrics.
But serious questions started arising about the viability of the underlying technologies along with Lordstown’s ability to meet its lofty production goals. As I mentioned in May of this year, the New York Times provided a detailed list of the company’s shortcomings.
Soon after my article was published, I received criticism for rehashing speculation and skewed facts about Lordstown, while being mildly gaslighted by speculation in favor of RIDE stock.
For anyone who still has a problem with my May article, please let the New York Times know about its allegedly false coverage of Lordstown, of which I based my thesis. As of this writing, the Times has yet to change its tune or tone.
Until I see a retraction, betting on RIDE based merely on its status as one of the short-interest stocks is very risky.
Short-Interest Stocks: Intercept Pharmaceuticals (ICPT)
On the surface, Intercept Pharmaceuticals seems to offer a hidden contrarian case — and it just might be that, to be blunt. As of the latest read (August 31, 2021), Intercept featured a short percentage of float of 39.4%, which is incredibly high. The short ratio or days to cover is not quite as alarming for your information, at just under six days.
What makes this intriguing for the bulls is Intercept’s flagship drug Ocaliva, where the pharmaceutical firm has the worldwide rights to develop the therapeutic outside Japan and China. Medical professionals use Ocaliva to address primary biliary cholangitis (PBC), a “chronic, cholestatic, autoimmune disease with a variable progressive course,” per the American Journal of Gastroenterology.
While offering a compelling contrarian case, the problem is that the bulls have been supporting the upside narrative for a very long time — and it has nothing but terrible results to show for it. On a year-to-date basis, ICPT has dropped nearly 44% while against the trailing year, it’s down almost 65%.
However, the good news is that Intercept finally generated positive operating income in Q2 of this year. Over the past month, ICPT is up over 12%. So it’s possible that a recovery could be on the way although for most investors, this is probably too risky.
Another one of the short-interest stocks that I’m conflicted on, SmileDirectClub seems to offer a very compelling contrarian argument. First off, the market has badly bruised SDC, with shares down nearly 49% YTD. What initially started off in the open market as a double-digit equity unit has turned into a stock that closed at exactly $6 on the Sept. 16 session.
But that means shares represent an upside opportunity right? It’s possible given that it’s one of the most negatively viewed short-interest stocks. The latest data indicates that SDC has a short percent of float of almost 33%.
Also, let’s acknowledge the massive catalyst. With society gradually normalizing — or at least acclimating to the new normal — more folks are out and about. That means there’s a greater incentive to look good, bolstering the narrative for SmileDirectClub.
But is that enough to overcome the wall of worry that has surrounded SDC? Here’s the deal — SDC broke down just below the $7 level in early August. Therefore, shares must rise convincingly above $7 for investors to have a measure of confidence. Otherwise, I’d probably leave this one alone.
Short-Interest Stocks: iRobot (IRBT)
Frankly, iRobot is one of the short-interest stocks that could go either way. But I’m going to lay out the dynamics surround IRBT so that you can make an informed decision.
On the surface, IRBT immediately appeals to the meme-trade crowd, which features a short-percent of float of 41%. Also, don’t ignore that the days to cover is 15.4 days, which combined could spell a short-squeeze opportunity. Usually, analysts consider days to cover over 10 as being very pessimistic. As you know, too much pessimism in this environment could spell trouble for the bears.
But then, why are the bears so optimistic about their position? Mainly, I believe it’s because of the semiconductor crisis. Unlike dumb vacuum cleaners, smart variants like iRobot’s require computer chips to function properly. But what do we have so little of right now? Computer chips.
You’ll notice that in Q2 2021, iRobot’s net income fell into negative territory, which is an unusual development. Now, the semiconductor crisis will not last forever, which is positive for IRBT. However, the crisis may drag on longer than previously expected, which would not be great for iRobot.
Ultimately, conservative investors may be best left waiting till the end of the year before betting on IRBT.
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.