Looking at short-squeeze stocks in this risk-off environment may seem a little crazy to most investors. Indeed, I agree with you. However, it could still make sense to have some “fun money” in high-risk, high-reward picks. That’s because such stocks provide big potential payoffs, if the economic cycle shifts. Certain stocks may deliver triple-digit returns or more and “moon” if the stars align just right.

I believe it’s wise to at least have these opportunities on your radar. While I won’t be looking at stocks plagued by dilution or mounting losses, I do think a handful are poised for jaw-dropping rallies thanks to their high short interest and potential catalysts.

Of course, short squeezes are inherently risky and unpredictable. Timing is everything. However, with the potential for a new macroeconomic environment on the horizon, conditions may soon be ripe for bears to get caught offsides on the wrong stocks. Let’s dive in!

Upstart Holdings (UPST)

Upstart Holdings (NASDAQ:UPST) is an AI lending platform that partners with banks and credit unions to provide consumer loans. The company has faced challenges recently due to high interest rates and a tough macro environment. However, I believe Upstart’s long-term prospects remain strong.

I’ve been bullish on Upstart and called it a short-squeeze candidate last week. This call has paid off so far after the company’s recent earnings report, with the stock up around 40% since. However, it’s important to remember that I’ll probably be more wrong than right in the near-term due to the nature of short-squeeze candidates. Regardless, I think Upstart offers comparatively less risk at current levels.

Most of Upstart’s problems stem from high interest rates, which cause borrowing to slow and banks to be skeptical about using new technologies. However, as we enter a new cycle, I think UPST stock should recover in the long-run, with or without a potential short squeeze along the way. Upstart reported Q2 revenue of $128 million and expects Q3 revenue of approximately $150 million. The company also launched its new M18 credit pricing model and expanded product offerings.

As the company’s top line and margins recover, I expect the stock to follow suit.

Trupanion (TRUP)

Trupanion (NASDAQ:TRUP) provides medical insurance for cats and dogs across the U.S., Canada, and Australia. The company recently announced strong Q1 2024 results, with total revenue surging 19% year-over-year to $306.1 million and subscription revenue jumping 22%.

Due to social and demographic trends, I’m quite bullish on pet stocks over the long-run. Most young Americans do not wish to have children and prefer pets instead. Regardless of how you look at that, I think pet stocks could benefit from this trend over time.

Trupanion is one such stock to consider in this space, and is also one that’s seen some pretty strong growth. The company is pretty close to profitability right now and is expected to almost break even next year, along with low double-digit growth. Analysts estimate Trupanion will generate sales of $1.26 billion in 2024, up 13.5% from 2023.

The huge amount of short selling here is unwarranted as the stock looks reasonably priced and is almost profitable. If Trupanion surprises investors, any surge could lead to panic that drives a short squeeze among bears. The stock recently hit a 52-week high of $37.05 amid its recent impressive growth, even as its founder, Darryl Rawlings, stepped down as CEO.

Advantage Solutions (ADV)

Advantage Solutions (NASDAQ:ADV) provides business solutions to consumer goods companies and retailers. Under CEO Dave Peacock’s leadership, the company has been simplifying its portfolio, divesting non-core businesses, and investing in its core capabilities over the past year. In Q2 2024, Advantage reported revenues of $873 million, a 1% increase year-over-year, excluding the impact of the deconsolidation of its European joint venture. Adjusted EBITDA came in at $89.9 million, up slightly from the prior-year quarter.

I believe Advantage Solutions could benefit significantly in this current environment. That is, if certain retailers increase their spending in the coming quarters to drive efficiency. After an expected dip this year, the company is poised to return to profitability in 2025. However, you should be aware of the substantial risk with ADV stock, as we’re currently experiencing a market selloff and potentially heading into a recession. This could lead retailers to reduce their marketing budgets, hurting this company’s valuation.

That said, if Advantage continues to execute well and achieves profitability next year as anticipated, this is a stock that might catch short sellers off guard.

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.

On the date of publication, the responsible editor did not have (either directly or indirectly) any positions in the securities mentioned in this article.