Thanks to social media platforms, retail investors learned firsthand the power of short-squeeze stocks. Essentially, through coordinated action, it’s possible to overwhelm securities featuring heavy bearish sentiment. Subsequently, rising prices of the affected securities may cause bears to panic out of their positions to avoid theoretically unlimited losses. However, a flipside to this narrative exists.
Primarily, the existence of short-squeeze stocks symbolizes a bearish framework, not a bullish one. In other words, a negative catalyst had to materialize to inspire short traders. Because of the huge risks involved in shorting an enterprise, a business that attracts so much pessimism must be awful.
Second, the purpose of bidding up short-squeeze stocks centers on overlooked bullish fundamentals. However, more than a few bearish trades show little to no apparent redeeming factors, yet they continue to attract speculators. That’s frustrating, to say the least. Below are seven companies that break the rules regarding short trades.
World Wrestling Entertainment
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Back during the worst of the Covid-19 pandemic, many folks on the east coast bought their first car in a long time or ever, which makes sense. At the time, no one wanted to use public transportation. Naturally, the fear of the SARS-CoV-2 virus made Carvana (NYSE:CVNA) and its vehicle-delivery service relevant. However, as those fears faded and another pandemic – this one related to inflation – took over, CVNA lost its charm.
Therefore, it’s not surprising on some level that Carvana shares ranked among the short-squeeze stocks. What has the bears frustrated, though, is that the bulls continue to pour into the enterprise. Really, this breaks all the rules associated with abandoning companies that lost a grip on their key businesses. Still, the bulls remain undeterred, bidding up CVNA to a gain of over 86% since the beginning of this year.
Adding fuel to the inferno are the financials, which are hideous. For example, Carvana’s Altman Z-Score sits at 0.65, indicating distress and high bankruptcy risk. Also, its cash-to-debt ratio sits at 0.05, worse than 92.12% of its peers. Yet the optimists love it.
Silvergate Capital (SI)
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Sometimes, short-squeeze stocks can spark a quick panic as coordinated action by the bulls frightens bearish traders. However, with an enterprise like Silvergate Capital (NYSE:SI), arguably few people should take the opposite trade. Despite the announcement last month that Silvergate will wind down operations and liquidate its bank, SI attracts speculative attention.
According to data from Benzinga, SI ranks as one of the most bearishly targeted securities. Presently, it features a short interest of 63.87% of its float. Still, it occasionally lures in bullish traders. During the April 19 session, SI popped up nearly 6%. Frankly, nobody should be taking any risk with Silvergate, considering that since the Jan. opener, SI fell nearly 91%.
Notably, the company suffers from middling stability in the balance sheet. Its cash-to-debt ratio pings a mediocre 1.06, worse than 53.66% of its peers. Also, its equity-to-asset ratio sits at 0.05, worse than 88.2% of companies listed in the banking industry. As a final sendoff, Wall Street analysts peg SI as a consensus moderate sell.
World Wrestling Entertainment (WWE)
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Another name within the dubious list of most-shorted securities, bears believe they have good reason to target World Wrestling Entertainment (NYSE:WWE). A professional wrestling organization, WWE might appeal to members of Generation X and older millennials. However, its tacky, politically incorrect events shouldn’t appeal to the current generation of consumers. Therefore, the pessimists see it going down.
However, WWE courts attention as one of the top short-squeeze stocks, frustrating the bears. On paper, WWE incurred a short interest of 63.56% of its float. Its short-interest ratio comes out to 7.5 days to cover. While these stats imply negative price action, WWE stock breaks the rules. It’s turning in quite the performance, gaining over 54% of equity value since the Jan. opener.
Still, one wonders how long the bulls will continue towing the line. Per investment resource Gurufocus, WWE rates as significantly overvalued. Objectively, the market prices shares at a forward multiple of 36.96. In contrast, the sector median value sits at 13.24 times.
Big Lots (BIG)
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As an American furniture and home décor retailer, Big Lots (NYSE:BIG) doesn’t natively appear a logical choice for short-squeeze stocks to buy. Fundamentally, the consumer economy appears to be hurting. According to Finder’s Consumer Confidence Index, a vast majority (82%) of survey respondents stated that they’re stressed about their current financial situation. Thus, it’s not a great time for furniture retailers.
Unsurprisingly, then, BIG stock plunged 33% since the start of this year. In the trailing one-year period, it’s down over 74%. Moreover, the bears took notice, spiking Big Lots’ short interest to 56.43% of its float. Also, its short-interest ratio pings at 6.6 days to cover. While these stats are elevated, stubborn bulls continue to help keep BIG stock afloat.
Again, it’s going to be interesting to see how long the bulls keep breaking the rules. According to Gurufocus, Big Lots represents a possible value trap. Basically, the company features a weak balance sheet encumbered with debt. Also, its trailing-year net margin sits at nearly 4% below breakeven.
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On a similar note to Big Lots, Wayfair (NYSE:W) draws attention as one of the short-squeeze stocks to buy. Naturally, this circumstance only serves to frustrate the bears. One of the more remarkable stories following the early days of the Covid-19 pandemic, Wayfair flourished as people took advantage of ultra-low interest rates, buying up real estate. Therefore, these homeowners needed new furniture and other goods to liven up their environment.
However, with the rapid rise of inflation in 2022, the narrative for W stock quickly soured. Eventually, Wayfair became one of the most-shorted securities, with a short interest of 49.94%. However, the bulls have other ideas, deciding instead to prop up shares. Since the January opener, W gained nearly 12% of its equity value.
Nevertheless, this magnitude of optimism breaks all the rules. Looking at its financials, Wayfair suffers from poor stability in the balance sheet. Its Altman Z-Score sits at 1.28, indicating a distressed enterprise. Also, its net margin sits at nearly 11% below breakeven, a worrying stat.
Speaking of real estate, Offerpad (NYSE:OPAD) appears to be breaking all the rules of short-squeeze stocks. Typically, this contrarian approach will target enterprises with overlooked positive catalysts. However, from those initiating bearish positions against OPAD, such catalysts seem limited, if they even exist at all.
Basically, Offerpad streamlines the real estate transaction process, pitching the idea to would-be home sellers that the company can provide an immediate cash payout. Plus, it will offer three days after the closing date to move out so that families don’t feel rushed. Unfortunately, this narrative was really only relevant back during the 2020 and 2021 buying spree. Now? Not so much.
With rising interest rates, few qualified homebuyers exist. And the few home sellers in the market want the top dollar that their former neighbors got. Therefore, Offerpad suffers from a double headwind, with no easy solution in sight. Unsurprisingly, OPAD’s short interest hit 40% of its float while its short interest ratio pinged at 15.3 days to cover. So, even with OPAD up nearly 20% on a year-to-date basis, prospective traders should be careful.
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Perhaps the most vexing name among short-squeeze stocks for bearish traders, many will point to Novavax (NASDAQ:NVAX) as an enterprise whose best days are behind it. True, during the worst of the Covid-19 crisis, Novavax gained fame for participating in the vaccine race. That race is now done, with the big pharma winners taking the prize. That leaves little room available for NVAX.
Nevertheless, NVAX stubbornly sticks around as one of the short-squeeze stocks. Overall, we’re talking about a security that gave up over 83% of equity value in the trailing one-year period. However, in the past 30 days, NVAX shot up nearly 50%. Unfortunately for the pessimists, Novavax refuses to die.
Still, no one knows how long the company can hold on. Right now, NVAX’s short interest stands at 38.69%. Its short-interest ratio comes out to 5.3 days to cover. Finally, Gurufocus warns that NVAX may be a possible value trap. Suffering from a distressed balance sheet and negative profit margins, investors should tread carefully with Novavax.
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On the date of publication, Josh Enomoto 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.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.
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