It can be fun to speculate on short-squeeze stocks. When the stars align just right, these heavily bet against companies can see their shares skyrocket, leading to tremendous gains for shrewd traders.
However, most of the time, traders should probably be looking to sell potential short-squeeze stocks. After all, bears usually take interest in companies with weak fundamentals, poor balance sheets, and limited long-term prospects rather than companies with more promising futures. On a long enough timeline, a distressingly high number of meme stocks end up seeing their share prices collapse.
In other words, short-squeeze stocks should usually be approached as trading opportunities, not long-term investments. And in the case of these three-short squeeze stocks to sell, the magic has long since faded, leaving only the grim reality of declining businesses facing large operating losses.
Gamestop (GME)
Gamestop (NYSE:GME) was the poster child for the 2021 short squeeze and meme stock phenomenon. GME shares went to unbelievable heights as retail traders showed the power of an organized action around a particular company’s stock.
Unfortunately, all the meme stock excitement in the world couldn’t change the fact that Gamestop is a struggling business in a seemingly dying industry. There’s just not much reason for the average consumer to drive to a mall to buy video games anymore in an era where malls are in decline and most games can be bought through digital marketplaces. Gamestop is attempting to address this by devoting more of its store space to collectibles and other items, but these efforts have been met with limited success.
Activist investor Ryan Cohen has now taken over as CEO at Gamestop to try to right the ship. But he faces a stiff challenge. In a recent memo, he warned that the company must be “extremely frugal” as it slashes operating expenses. This is a retail chain clearly in survival mode. Perhaps Cohen will be able to stem the red ink to a degree. But there’s little to no reason for Gamestop to still have a $4.5 billion market capitalization today given its dire situation.
AMC Entertainment (AMC)
Next on the list of short-squeeze stocks to sell is AMC Entertainment (NYSE:AMC), another of the former meme stock darlings that has fallen on hard times.
Simply put, AMC was barely profitable even prior to the pandemic. Since then, with movie attendance struggling to return to its former glory, AMC has not been able to get anywhere near breakeven. Soaring interest rates further complicate matters given AMC’s massive debtload.
The company recently completed its share conversion of its APE preferred stock units. This led to a massive amount of dilution and AMC stock lost the majority of its value during that transaction. Let’s be frank: AMC’s old, inflated share price is never coming back.
If AMC can’t figure out some way to massively cut costs and shrink its debtload, it will be increasingly difficult to avoid bankruptcy.
Before saying that can never happen, just consider Bed Bath & Beyond. BBBY stock was a leading meme play, and social media was full of optimistic theories about how the retailer could return to its former glory. But in the end, the company’s unmanageable debt put an end to the comeback narrative. The firm filed bankruptcy, the stock was delisted, and then last week, shares were “canceled, released, and extinguished.”
Anyone that held BBBY stock to the bitter end saw their former investment become entirely worthless. I fear that’s where AMC stock’s journey will end as well.
Carvana (CVNA)
Carvana (NASDAQ:CVNA) is a used car retailer. It inexplicably became a hot momentum stock a few years ago as people mistook its car vending machines and complicated financial model as some sort of sustainable innovation in the industry.
However, Carvana was never particularly close to becoming consistently profitable, and its losses are growing as the used car market rolls over. Understandably, CVNA stock has become one of the most heavily shorted out of the entire marketplace.
That’s with good reason. Carvana lost a shocking $1.3 billion last year. And analysts expect it to remain massively unprofitable through at least the end of 2025. It’s hard to see how Carvana could hope to stay in business long enough to turn things around. The company has a huge assortment of debts and liabilities and has negative book value.
Short interest is astronomical on CVNA stock, so there is a temptation to try to play the short squeeze. But Carvana’s business model simply hasn’t shown any signs of working, the balance sheet is atrocious, and the used car market is plunging. There seems like a good chance that Carvana will ultimately seek bankruptcy restructuring and shares are a strong sell.
On the date of publication, Ian Bezek 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.
