You want potential short-squeeze stocks that could have the bears running for cover? Great, we got ‘em right here! But first, we need to know the rules of the game. Let’s start with the definitions:
- Short interest: Number of shares borrowed from brokers to initiate the short trading activity.
- Short interest percentage of float: The percentage of the publicly available share count being “earmarked” as a short position.
- Short interest ratio (i.e. days to cover): The number of trading sessions necessary for bears to unwind all their short positions.
Conceptually, it’s important to understand how potential short-squeeze stocks materialize.
- Short traders borrow the target shares from a broker, sell them in the open market and hope that they fall in value. If they do, the bears can scoop up the cheapened securities, return them to the broker and pocket the difference.
- However, a squeeze materializes if the security rises in value.
- The more the stock rises, the more difficult life becomes for the bear: mitigate the pain now or hope for the best? Of course, misplaced hope can lead to financial disaster.
By stacking more of the odds in your favor – high short interest relative to float and ratio, analyst optimism, hedge fund buying – your contrarianism may pay off. Below are compelling short-squeeze candidates to consider.
Westrock Coffee (WEST)
Based in Little Rock, Arkansas, Westrock Coffee (NASDAQ:WEST) bills itself as a leading integrated coffee (and related ingredients) solutions provider. I wish the company would just say that clearly upfront on its website rather than have me dig for it in its Form 10-K but here we are. Thanks possibly to a surprisingly robust labor force, analysts rate shares a consensus moderate buy.
Where WEST becomes a compelling idea for potential short-squeeze stocks is its core statistics. Per Fintel, Westrock prints a short interest of 17.75% of its float. Even more conspicuously, its short-interest ratio stands at 45.66 days to cover. Given that there are about 20 to 22 business days (i.e. trading sessions) per month, the bears will need more than two calendar months to cover their short positions.
If something goes wrong with their trade, WEST could rise up in a hurry. Oh yeah, something could go very wrong because according to TipRanks, hedge fund sentiment for this security is “positive.” Therefore, WEST seems like a solid idea for short-squeeze candidates.
Encore Wire (WIRE)
An industrial play among potential short-squeeze stocks, Encore Wire (NASDAQ:WIRE) is a leading manufacturer of wire and cable products. Per its website, it features innovations in product development and unparalleled service. With the U.S. economy proving incredibly resilient despite myriad pressure points, WIRE has been robust, moving up 39% in the trailing year. Still, the bears are skeptical, making Encore an intriguing contrarian play.
Right now, D.A. Davidson pegs WIRE a buy with a $240 price target, implying over 13% upside potential. Info from Fintel shows that WIRE’s short interest comes in at 24.26% of its float. Also, the short-interest ratio lands at 24.93 days to cover. Adding to the heat for the bears, hedge fund sentiment for Encore is positive, with total exposure rising 8% between the second quarter to Q3 of last year.
What really makes WIRE one of the short-squeeze candidates is the lack of glaring financial vulnerabilities. Featuring no debt and consistent profitability, it’s difficult to see WIRE collapsing. Use this to your advantage if you’re a speculator.
Trupanion (TRUP)
A pet insurance provider, Trupanion (NASDAQ:TRUP) lost almost 51% of its equity value in the past 52 weeks. It’s understandable. As I mentioned in my segment in CGTN America’s Global Business program, the inflation rate for pet-related products is about twice that for regular consumer goods. Therefore, it’s not shocking that costs for related services such as insurance have increased as well.
By that logic, it’s also not surprising that TRUP is one of the potential short-squeeze stocks. With so much red ink, it’s invariable that at least some believe that the pain will continue. However, analysts are willing to stay the course, rating shares a consensus moderate buy with a price target of $37.67. That comes out to potential growth of over 37%.
Per Fintel, TRUP’s short interest stands at 36.12% of its float. Also, its short interest ratio is 21.26 days to cover. A clear wrinkle to this trade is per TipRanks, Trupanion’s hedge fund confidence signal is positive. Therefore, it’s one of the short-squeeze candidates to put on your radar.
MGP Ingredients (MGPI)
Billed as a premium spirits manufacturer, MGP Ingredients (NASDAQ:MGPI) encountered some choppiness in 2023. Over the past 52 weeks, MGPI ended up losing about 7% of its equity value. However, at one point last year, shares were trading hands above the $120 level. If the underlying consumer economy improves, MGP Ingredients could be an interesting idea for potential short-squeeze stocks.
At the moment, the bears are not giving the company much of a chance. MGPI’s short interest comes in at 21.26% of its float. Also, the short interest ratio is elevated at just over 20 days to cover. Still, these inauspicious signals seemingly ignore the overwhelmingly bullish sentiment for MGPI among analysts. Specifically, it’s a unanimous strong buy with a $131.40 price target, projecting nearly 46% growth potential.
Now, it’s important to point out that between Q2 2022 and Q1 2023, hedge funds began exiting out of MGPI. Still, between Q2 and Q3 of last year, these funds increased their exposure by almost 19%. With the big dogs buying in recently, MGPI could be one of the short-squeeze candidates.
Bowlero (BOWL)
A delightful oddball among potential short-squeeze stocks, Bowlero (NYSE:BOWL) is the world’s largest owner and operator of bowling entertainment centers. Per its website, Bowlero delivers unique experiences to over 40 million guests at approximately 350 locations throughout the U.S. However, BOWL’s chart performance betrays its relevance to the entertainment space, with shares down nearly 14% in the trailing year.
Even worse, since the beginning of the year, BOWL slipped more than 16%. As a result, the bears began licking their lips. Short interest jumped to 90.68% of its float while the short interest ratio stands at 21.88 days to cover. Some evidence from Fintel points to a possible widescale reduction in shares available for shorting activities. Also, the short borrow fee is elevated at 14.56%.
Here’s the other thing that makes BOWL a dangerous idea to short. Right now, analysts peg BOWL a unanimous strong buy with an $18 price target. If that wasn’t enough, sentiment among hedge funds for Bowlero is “very positive.” Arguably, it may be the most exciting idea among short-squeeze candidates.
CompoSecure (CMPO)
Diving into the high-risk, high-reward segment of potential short-squeeze stocks – as if the other ideas were somehow safe (they’re not) – CompoSecure (NASDAQ:CMPO) is a tough nut to crack. Specializing in secure payment card technologies and solutions, CompoSecure provides innovative security features that protect against counterfeiting and fraud in the payment card industry. It’s relevant but not according to investors.
In the past 52 weeks, CMPO lost almost 14% of its equity value. Since its public market debut, shares are down more than 47%. With the pain comes opportunistic skepticism. Per Fintel, CMPO’s short interest as a percentage of its float stands at 44.93%. Also, its short interest soars to 57.72 days to cover. The bears really “hate” CompoSecure but that also makes it vulnerable to a contrarian comeback.
Analysts view shares as a consensus moderate buy with a $10.50 price target, implying almost 103% growth potential. Now, it’s fair to say that CMPO’s hedge fund activity is neutral. However, TipRanks notes that insider trading activity is positive, which could make things very interesting.
Verrica Pharmaceuticals (VRCA)
A dermatology therapeutics company, Verrica Pharmaceuticals (NASDAQ:VRCA) develops medications for skin diseases requiring medical interventions. Because the company addresses certain sensitive issues, it’s relevant because of the critical unmet needs. Sure enough, the market acknowledges Verrica’s importance to the biotechnology ecosystem, with shares up 28% in the trailing year. However, it’s been a wildly choppy ride.
Given the instability of VRCA, many traders have gone negative against the company. According to Fintel, VRCA’s short interest clocks in at 33.38% of its float. Also, the short-interest ratio is elevated at nearly 24 days to cover. To be fair, Gurufocus warns that Vericca suffers from six financial red flags. This includes an Altman Z-Score of 0.81 below parity, indicating distress.
However, analysts are not deterred by the negativity, rating VRCA a unanimous strong buy. As well, the average price target jumps to $12.25, implying over 107% upside potential. If you want to ramp up your risk-reward profile, Verrica is one of the potential short-squeeze stocks to consider.
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.