There are many ways to approach penny stocks, but one that has gained popularity in recent years focuses on stocks in this category that are prime candidates for a “short squeeze.”
A typical short squeeze candidate has a high level of short interest, or percentage of outstanding float sold short. With the short side of the trade heavily crowded, and a few shares publicly available to cover these short positions, there is the potential for big gains for those on the long side of the trade.
A sudden surge, driven by the release of positive news, and/or by en masse buying from “meme stock” speculators, can leave the short side scrambling to cover positions, which can turn what started as a regular stock rally into a “to the moon”-style move higher.
Now, not every low-float, heavily shorted penny stock is a prime candidate for this strategy. Sometimes the “smart money” is on the money. With this in mind, let’s look at seven penny stocks within this category, and see whether there’s a squeeze opportunity among them.
Allogene Therapeutics (ALLO)
Allogene Therapeutics (NASDAQ:ALLO) is a clinical-stage biotech firm specializing in developing allogeneic T cell cancer treatment therapies. Around 67.4% of ALLO’s share count consists of publicly-traded float. Out of this float, around 30% has been sold short.
Year-to-date, ALLO stock is down by more than 50%, but earlier this month shares experienced a short-lived rally. This rally was driven by a well-received earnings report. News of the company presenting preclinical data on two of its pipeline candidates at a medical research conference was also a factor.
Given the recent positive news, plus the current high level of short interest in the stock, those well-versed in biotech investing may want to take a closer look at ALLO. The upside potential from an unforeseen breakthrough could outweigh the risk of a further decline in price caused by underwhelming progress with the company’s current crop of candidates.
BioXcel Therapeutics (BTAI)
BioXcel Therapeutics (NASDAQ:BTAI) is another of the low-float, heavily-shorted penny stocks in the biotech space. Based on its “about us” page, BioXcel is riding the coattails of “AI Mania,” emphasizing its use of artificial intelligence to “develop transformative medicines in neuroscience.”
Short sellers are likely betting against it because of the company’s setbacks/uncertainty surrounding its business restructuring, but they perhaps also see the opportunity to fade what remains of any AI hype with BTAI stock. Around 69.8% of BTAI’s outstanding shares are freely-floated; out of this float, 28.45% has been shorted.
Before buying BTAI as a squeeze play, keep these factors in mind, as well as the fact that recent developments with BioXCel also work in the favor of the short side. On Nov. 14, a disheartening pipeline update sent the stock plunging 23.4%. Shares have since then continued to move lower.
Torrid Holdings (CURV)
Torrid Holdings (NYSE:CURV) is a retailer of plus-size women’s apparel. A short-seller target in 2022, Torrid has again become heavily shorted over the past few months. Just 9.16% of CURV’s outstanding share count is freely floated, with 23.3% of this float sold short.
At first, this may make it seem as if CURV stock is a perfect candidate for a long “short squeeze” position. However, look at recent price action. Since September, Torrid stock has gone from around $1.30 to $3.70 per share. That represents a nearly threefold jump in price.
The prospect of high inflation and high interest rates having a “less bad” impact on Torrid’s financials may be already priced-in. Unless Torrid manages to beat expectations over the next few quarters, the bears may have the edge right now. Hence, wait for weakness before making this a squeeze play.
With around 28% of its outstanding shares freely floating, and 21.65% of this float sold short, Joann (NASDAQ:JOAN) is clearly one of the heavily shorted penny stocks with low floats. Unfortunately, shares in this fabrics store chain are also clearly not a great opportunity for those on the prowl for a possible squeeze play.
Sure, back in August I argued that any indication that this floundering retailer would avoid Chapter 11 bankruptcy had the potential to spark a big short-squeeze rally for JOAN stock. However, in the months since making this argument, macro and company-specific developments suggest that the risk of a “game over” moment has kept climbing.
Barring the unveiling of miraculously improved fiscal results, when Joann next reports earnings on Dec. 4, while the shorts may start to take a profit on their bearish positions, it may be best not to bet on a JOAN squeeze rally.
ProKidney (NASDAQ:PROK) is another low-float, heavily shorted biotech penny stock, but with a twist. This company went public via a merger with a special purpose acquisition company (or SPAC) set up by SPAC impresario Chamath Palihapitiya.
Much like several of Palihapitya’s deSPACed SPACs, PROK stock has not fared well. Shares today trade for more than 80% below their original SPAC price.
However, even after this big drop, short interest with shares in this developer of a cell therapy treatment for chronic kidney disease remains high, at 23.4% of outstanding float.
Worse yet, while un-floated shares have made up a relatively large percentage of the share count, this is changing. Palihapitiya recently disclosed that he has sold around 7.25 million shares. With an insider cashing out, after the shorts have piled in, it may be best to stay away from PROK, even as a squeeze play.
SiriusXM Holdings (SIRI)
This year, SiriusXM Holdings (NASDAQ:SIRI) has become one of the penny stocks with high short interest.
Shares in the satellite radio company have also become one of the more popular short squeeze plays. Earlier this year, hedge funds attempted to arbitrage the price difference between SIRI and tracking stock Liberty SiriusXM Group (NASDAQ:LSXMA)
Unfortunately for these arbitrageurs, or “arbs,” they were squeezed out of positions due to a short-squeeze rally experienced by SIRI stock, as InvestorPlace’s Eddie Pan detailed back in July. Currently, the short side with SIRI remains crowded (27.5% of float).
This makes sense. Majority owner Liberty Media’s plans to split-off its SiriusXM ownership. This has made the arbs go long LSXMA and short SIRI once again, in order to capture a double-digit deal spread. However, this may also mean that the opportunity for retail traders to squeeze the pros may have re-emerged.
NuScale Power (SMR)
Despite growing excitement about nuclear power’s potential as a clean, renewable energy source, investors have soured, and short interest has increased, with shares in small modular reactor builder NuScale Power (NYSE:SMR).
Only 13.5% of SMR’s outstanding share count has been sold short. However, with only 63.2% of shares freely floating, SMR stock has much higher short interest as a percentage of float (21.4%). One more vocal short-seller (Iceberg Research) even put out a scathing “short report” on NuScale. In the report, Iceberg made some serious allegations.
As I argued back in October, there may be big potential for this stock to “melt up” back to higher prices, given the potential for small modular reactors becoming widely used around the world. That said, I also noted that waiting things out, until the company disproves Iceberg’s allegations, is the best course of action in the near-term.
On the date of publication, Thomas Niel did not hold (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.