Short-squeeze stocks are gaining a lot of popularity among retail investors, especially those who are active on Reddit (NYSE:RDDT). Of course, it’s impossible not to mention the “Roaring Kitty” phenomenon, which caused many heavily-shorted stocks to become big winners overnight.

The short-squeeze craze we’re seeing now has been long in the making. The market has seen a stellar rally that has surpassed the 2021 rally in many aspects. As such, we’re seeing more and more investors pile into riskier bets.

If you think there’s going to be a next leg higher in these meme stocks, it may make sense to consider some of them. Some dead-end short-squeeze stocks will eventually bleed out, but I think these three have a promising future.

Upstart Holdings (UPST)

Upstart (NASDAQ:UPST) provides an AI lending platform for banks and credit unions. Despite the challenging macroeconomic environment, I believe Upstart is well-positioned for a potential short squeeze. The stock has recovered from its recent lows, but still faces headwinds from a wobbly banking sector and reduced consumer borrowing. However, Upstart’s CEO Dave Girouard recently highlighted improving funding conditions for banks and credit investors, a trend that could continue through 2024.

The company’s management team is also taking decisive actions to boost efficiency, including cutting $20 million in headcount expenses and reducing cloud infrastructure costs by 23% year-over-year. These moves should help Upstart return to profitability faster once the macro situation improves.

While a number of analysts remain bearish due to near-term challenges, I think the stock’s 33.7% short interest is overshadowing Upstart’s long-term potential. As interest rates eventually normalize and banks recover, Upstart’s business should rebound nicely. Any positive surprises could catch short sellers off-guard and trigger a significant squeeze.

Lemonade (LMND)

Lemonade (NYSE:LMND) provides a range of insurance products powered by artificial intelligence. Despite the challenging environment for financial stocks, I believe Lemonade is poised for a potential short squeeze as we enter a new economic cycle with anticipated rate cuts. The company reported strong Q1 results, with 22% year-over-year revenue growth to $119.1 million and a 33% improvement in Lemonade’s adjusted EBITDA loss. The company’s loss ratio also improved by 8 points to 79%, reflecting the growing sophistication of its AI-driven underwriting models.

Looking ahead, Lemonade is expected to double its sales over the next three years while significantly narrowing losses.

Lemonade’s management team even pulled forward their projections for consistent positive net cash flow starting in early 2025. I’m particularly excited about the company’s rollout of auto insurance, which could substantially boost growth. With short interest sitting at a hefty 31.6%, the stars may be aligning for a sharp short squeeze in LMND stock as the company’s AI-powered platform hits its stride and the macro picture brightens.

B. Riley Financial (RILY)

B. Riley Financial (NASDAQ:RILY) provides investment banking and financial services to a broad range of clientele. I believe the bears are overly pessimistic about RILY stock, despite its recent challenges. The company generated solid operating results in Q1 with $66 million in operating adjusted EBITDA, although this number was down from $88 million a year ago. The company’s Advisory Services segment had a record quarter in terms of both revenue and operating income. Additionally, B. Riley’s Wealth Management operating margins continue to improve.

However, the company did face $59 million in mostly unrealized investment losses and higher costs related to filing delays and an internal review. Net interest coverage has weakened, and debt ratios have spiked, pressuring the stock. But I think this creates an opportunity. B. Riley is a well-known active player in the investment world with ample cash to weather this storm. Interest expenses are also plateauing, which could lead to greater cash flow down the road.

As interest rates normalize, profitability and coverage ratios should markedly improve. With short interest at a hefty 50.5%, RILY stock looks primed for a potential short squeeze. The stock’s current valuation seems very attractive to me.

On the date of publication, Omor Ibne Ehsan 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.