As a CNBC report recently pointed out, some publicly traded enterprises are standing out but for the wrong reasons. Feeling the pressure from the specter of an extended period of heightened borrowing costs, hedge funds have placed some sizable bets against certain companies. While the most shorted stocks this month represent a warning to retail investors, they also might signal opportunities for contrarians.
To quickly summarize, short traders typically bet against companies by borrowing shares of a target entity and subsequently selling them at the market price. Should the price of the underlying security fall, the trader buys back the borrowed amount at a lower rate, returning the borrowed shares and pocketing the difference as profit.
Although aiming at the most shorted stocks can be incredibly lucrative — especially during a broader downcycle — this practice also presents incredible risks. If the price of the target security rises, short traders would have to return borrowed stock at a higher rate. And because no upside limit exists, in theory, a bear might suffer unlimited losses.
Still, this framework hasn’t stopped hedge funds from identifying certain companies as bearish opportunities.
Major Players Move Against the Most Shorted Stocks
One of the most shorted stocks in September is, unsurprisingly, Novavax (NASDAQ:NVAX). Once a hot hand during the worst of the Covid-19 crisis, Novavax offered a vaccine candidate for the SARS-CoV-2 virus. A key advantage of the company was that it deployed the subunit approach, a technology seen in other widely used vaccines such as HPV, hepatitis B and the flu.
Unfortunately, other biotechs beat Novavax to the punch. Further, fading fears of Covid-19 resulted in a trailing one-year loss of about 64% for NVAX stock. Presently, its short interest as a percentage of float stands at a staggering 50.8%.
Another candidate for most shorted stocks is enterprise-level artificial intelligence (AI) specialist C3.ai (NYSE:AI). A technology firm with commanding significant infrastructural and defense-related relevancies, C3.ai received a significant boost due to the interest this year in digital intelligence protocols. Since the January opener, AI stock gained about 126%.
However, the tech space has been shaky recently. In the trailing month, AI lost more than 14% of its equity value. Per CNBC, its short interest as a percentage of float clocks in at 39.7%.
Finally, troubled used-car retailer Carvana (NYSE:CVNA) has been on a meteoric ascent this year, gaining 781% since the beginning of January. Undeniably remarkable, bearish speculators nevertheless believe the party is soon coming to an end. Right now, CVNA’s short interest as a percentage of float stands at 39.2%.
A Dubiously Honorable Mention
An honorable mention — for lack of a better word — goes to plant-based meat specialist Beyond Meat (NASDAQ:BYND). Initially riding the health-food sentiment pre-pandemic, the inflation-plagued post-Covid period exposed Beyond’s lack of economies of scale relative to the competition. As a result, BYND’s short interest lands at 38.3% of its float.
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.
