The stock market has primarily been on a tear this year. Year-to-date, the S&P500 and the Nasdaq indices have risen 14.75% and 35.44%, respectively. This expectation-defying capital appreciation was not without its moments of volatility, and, of course, not every sector in the equities market is performing up to par. Some consumer discretionary stocks have been under pressure from rising costs, supply chain disruptions, and increased competition. This article will look at three consumer stocks that could rally in the near term and trigger a massive short squeeze. These companies generally have high short interests, which means many investors are betting against these shares relative to the total outstanding shares in the market. Instead of hoping for a miracle, equity investors are betting off selling and moving on.
Ralph Lauren (RL)
This world-renowned brand requires little introduction. A global leader in apparel, Ralph Lauren (NYSE:RL) designs, markets, and distributes premium lifestyle clothing and accessory products. The famed apparel company operates in three geographic segments: North America, Europe, and Asia. Unfortunately, despite having garnered much brand awareness and a sizable customer following, the company has struggled to meaningfully grow revenue and earnings for many years.
If an investor were to look at a decade’s worth of Ralph Lauren’s income statements, they would notice the company has, at times, endured periods of two or three years of consecutive revenue contraction. A global pandemic in 2020 did not help. About 12 months after the pandemic had begun, Ralph Lauren posted a 29% year-over-year decline in revenue and a 68% decline in net income. Once pandemic-era restrictions were lifted, the apparel company benefitted from both broad, pent-up consumer demand. Still, even this was short-lived, as the fiscal year 2023 revenue growth, which covers growth from March 2022 to March 2023, was sluggish and came in at just under 4%.
Ralph Lauren has a relatively high short interest of 8.59%. This indicates that many investors are bearish on the stock and expect it to fall further in the near term. The past quarterly results have not breathed any new life into the company’s shares either. Revenue growth from Ralph Lauren’s North American and European reporting segments sharply declined year-over-year. Overall growth has been spurred by higher demand in Asia. Growth numbers could pick up overwhelmingly as China’s economy continues to recover. If this occurs, Ralph Lauren could surpass the expectations, triggering a short squeeze. That makes it one of the best consumer stocks right now, in my opinion.
Consumer goods, of course, are not only about apparel and related accessories. Carvana (NYSE:CVNA) is an e-commerce platform for buying and selling used cars in the United States. The platform grew rapidly in the past decade, mainly benefitting from the secular shift to online car buying. Similarly, post-pandemic demand for used cars amid the semiconductor shortage affected new car production. As a result, Carvana’s revenue increased by 129% year-over-year to $12.8 billion, while its net loss narrowed by 21% to $135 million.
However, that spectacular era of growth seems to have been short-lived. The e-commerce platform already operates in a highly competitive and fragmented market, where traditional dealerships, online platforms, and peer-to-peer marketplaces compete. Moreover, Carvana relies on third-party sources for its inventory and financing, exposing it to supply chain disruptions and certain credit risks. In particular, the company’s debt burden remains significant at above $7.6 billion as of June 30. Last year, as interest rates increased, Carvana’s stock price tanked as investors doubted its ability to bear higher rates.
Carvana still has a very high short interest of 32.6%, which suggests many investors remain skeptical about its ability to sustain its growth rate and profitability. However, the company has been able to beat profitability expectations in recent quarterly results, already pushing several short sellers into a squeeze. If Carvana continues to optimize its operations and beats profitability estimates, short sellers could find themselves again in a doomsday scenario.
Fisker (NYSE:FSR) is an electric vehicle (EV) startup that delivered its first model, the Fisker Ocean SUV, to the United States in June. The company has partnered with Magna International (NYSE:MGA), a leading automotive supplier, to manufacture the Ocean at Magna’s plant in Europe. Fisker also announced in 2021 that Foxconn would help it manufacture crossover vehicles.
Fisker has generated a lot of hype among investors as it aims to challenge Tesla (NASDAQ:TSLA) and other established automakers in the fast-growing EV market. The company claims that the Ocean will be the world’s most sustainable vehicle, with features such as a solar roof, recycled materials, and vegan leather. The company also boasts a low-cost and asset-light business model, as it leverages its partners’ expertise and capacity to produce its vehicles.
Unfortunately, the company has no revenue or earnings to date and expects to incur significant losses shortly. Much of the stock’s success will hinge on Fisker’s ability to successfully manufacture and sell its first vehicle. That manufacturing deal Fisker announced with Foxconn a couple of years ago still appears to be in negotiations. Still, if the deal is finalized and approved, short sellers could be pushed into a short-squeeze scenario. Thus, this is among the top consumer stocks to buy before a short squeeze.
On the date of publication, Tyrik Torres 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.