If you’re looking for some sort of investment edge, short squeezes seem to have become all the rage this year. These business phenomena are a big part of why names like GameStop and Bed bath and beyond ran higher, if only temporarily, earlier this year. Today, some investors are looking for the same thing – or even trying to make it happen.
To that end, here’s a closer look at three stocks with unusually high short interest at the moment and all potentially subject to a sequence of artificially induced buying. As to whether you should try to take advantage of it is another question – and it might be best left to professional investors.
But first. What is a short squeeze?
What is a short press?
If you don’t know, a short squeeze is the quick unwinding of short positions in a particular security. A short trade is the antithesis of a conventional stock market transaction designed to buy low and then sell high. On the contrary, short sellers sell a stock they don’t own in anticipation of being able to buy it for a lower price at some point in the future. Yes, it is absolutely legal.
It is also incredibly risky. The risk of simply buying and owning a stock can be significant, but at the very least, it is limited to the amount invested in a particular position. In the worst case, the stock loses all of its value. This contrasts with short selling. The risk of a short trade is effectively infinite as there is no cap on the price of a share. And the only way to close a short position is to buy it back to cover the stocks you’ve already sold. It’s just a question of price.
This is where the “squeeze” premise comes in. Think of it as a chain reaction. The higher a stock goes, the more nervous short sellers become. If enough of them get nervous at the same time, they all start buying the stock to cover their short position – a buy that only pushes that stock up, making other short sellers nervous enough to buy. these actions to hedge their short sale. trades, and so on.
A strangely excessive doubt
Almost all publicly traded stocks have some degree of short interest, i.e. free float stock held as short trades. But some tickers are much more heavily shorted than others. Some names with high short interest right now include Corsair game (NASDAQ: CRSR), Beyond meat (NASDAQ: BYND), and a video game content platform called Skillz (NYSE: SKLZ). For these stocks, 35%, 31% and 25%, respectively, of their floating stocks are currently short. For the point of view, Meta-platformsThe short ratio is 1% while that of GameStop has been reduced to 15%.
Doubt about these actions makes a lot of sense. Take the example of Corsair Gaming. Despite being one of the leading brands of video game accessories, last quarter revenue of $ 391 million was not only down 14% year-over-year. , but also below estimates. The company also warned investors that rising costs linked to the semiconductor shortage and supply chain crisis will remain an issue for the foreseeable future.
Beyond Meat’s shares have not only fallen out of favor with the bulls who had supported it so strongly over the past two years, but the big stock gains recorded last year made it a target this year. It is down more than 60% from the January peak, with short sellers apparently predicting the slowdown in demand we are seeing now. Sales of its products in the once-hot U.S. market fell nearly 14% year-on-year in the three-month period ended in early October.
As for Skillz, while the video game community appreciates the access it provides to esports events, that doesn’t change the fact that the company’s losses are growing faster than revenues are growing.
Put them on your radar
Of course, it’s entirely possible that the short sellers acted far too aggressively, paving the way for a sharp bullish reversal for each of these tickers. But that’s not a prediction that a short squeeze will drive all – or even some – of these stocks up.
Not only must the rhetoric surrounding these targets of short sellers take a decidedly bullish turn, the majority of interested investors must be prepared to act on this shift in rhetoric. This is not an easy task in light of the interest many short sellers have in keeping these stocks down. It also usually requires a strong news catalyst to initiate the unwinding of short positions that evolves into a full-blown short squeeze which is also difficult to pull together.
Still, the stocks of Corsair Gaming, Beyond Meat, and Skillz show particularly high short-term interest levels, suggesting the bears may have taken things too far. The market rarely endures such extremes for very long, leaving these names at least vulnerable to short squeeze. But again, keep in mind that this is a risky (not stupid) way to pick stocks, even by speculative standards. Most investors are probably best served by leaving this stuff to the pros.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Questioning an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.