Fueling the flames of speculative fervor, business news agency CNBC released its list of the most heavily shorted public securities. Topping the list stood used-car retailer Carvana (NYSE:CVNA). Biotechnology specialist Novavax (NASDAQ:NVAX) entered the list, ranked number four. Though short-squeeze stocks delight contrarian traders, the underlying practice represents a high-risk, high-reward venture.
For Carvana and Novavax, both enterprises benefitted from the same cynical catalyst: the unique dynamics associated with the Covid-19 crisis. Prior to the pandemic, Carvana catered to the marketplace in part because millennials intensely dislike the negotiation process with traditional dealerships. For Novavax, its mission to develop vaccines to counter serious infectious diseases offers obvious relevancies, though it struggled for consistency.
Following the Covid-19 disruption, both entities suddenly saw their underlying business models accelerate. Carvana benefitted richly from its car delivery service, facilitating largely contactless transactions at a time of paranoia. On the other hand, Novavax entered the race to develop a vaccine for the SARS-CoV-2 virus.
Still, as Covid fears faded, CVNA and NVAX naturally lost relevancy. At the same time, they became favorites among short-squeeze stocks. Per data from Fintel, CVNA carries a short interest of 65.16% of its float, while NVAX’s short interest is 41.25%.
Bears Get Flashbacks on Other Short-Squeeze Stocks
To be sure, playing with short-squeeze stocks may yield significant profitability over a short timeframe. Nevertheless, investors must know when to hold them and when to fold them. On the positive side, CVNA stock is up 156% since the January opener. However, on the other end, NVAX slipped more than 11% during the same period.
However retail investors will likely look to other names on CNBC’s list, given the intense interest in contrarian trading that began during the pandemic. For instance, plant-based protein provider Beyond Meat (NASDAQ:BYND) initially stood out for aligning with young consumers’ ethos. According to Supermarket News, 79% of Generation Z choose to go meatless one day a week.
Unfortunately, higher prices for the “fake” alternative hurt Beyond Meat. At the same time, this framework may shift positively for BYND, as the current lack of economies of scale translated to hardships. Fintel data shows that the short interest for BYND is 33.4% of its float. Also, its short-interest ratio stands at 11.29 days to cover. And initially, BYND popped higher for this year.
WeWork (NYSE:WE) represents another market idea where bearish targeting didn’t come off as a surprise. Following a rough time launching its shares in the public arena, when WeWork finally made its debut, it did so under rapidly shifting workplace paradigms.
Why It Matters
While short-squeeze stocks inherently generate excitement, participants must also be aware of higher-probability trades. In addition, should circumstances go awry, they must have the discipline to cut losses. For example, after some early pops this year, WE stock eventually stumbled to a roughly 71% loss. Also, BYND fell more than 31% this past month, leading to a year-to-date loss of approximately 17%.
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.