The short interest in the stock market has seen a 23% increase since the end of 2020. However, this doesn’t necessarily indicate a more bearish sentiment among traders.
The total number of stock shares has significantly grown due to initial public offerings and stock splits. Consequently, the relative short interest has actually decreased.
In large-cap stocks of the S&P 500, the short interest remains below 2% of outstanding shares. It’s important to note that major names like Tesla and Apple may have higher short interest values, but this generally has a minimal impact on their market movement and represents a small fraction of their market cap.
Conversely, small- and mid-cap stocks tend to have higher short interest ratios. In the S&P small-cap 600 index, the number of shorted shares has risen from 5.4% to 6.1% of total outstanding shares.
For investors, it’s worth paying attention to stocks with a higher ratio of shorted shares to total float, indicating more bearish sentiment from short sellers. Although most retail investors cannot engage in short selling, understanding short interest can serve as a helpful guide to avoid certain stocks.
Our analysis has identified several companies with notable levels of short interest. These include investment bank B. Riley Financial, electric vehicle company Fisker, pet insurance provider Trupanion, lending platform Upstart, and plant-based meat producer Beyond Meat. These companies have more than one-third of their floating shares sold short.
However, it’s important to consider that heavily shorted stocks also carry the potential for a short squeeze—a rally triggered by short sellers covering their positions to prevent further losses. The greater the short interest in a stock, the higher its price can surge in these events.
Interestingly, short sellers have already faced significant losses this year, amounting to nearly $178 billion according to December data from S3 Partners.
Memes Stocks and Short Squeezes: A New Phenomenon in the Stock Market
Since early 2021, an interesting trend has emerged in the stock market – the rise of “meme stocks.” These are heavily shorted stocks, such as GameStop and AMC, that have experienced astonishing surges in price due to the influence of retail traders on social media platforms like Reddit. While the hype around meme stocks has gained momentum, it has also attracted the attention of investors looking for more sustainable investment opportunities.
One particular group of stocks that has received significant attention lately is those with high short interest. These stocks, like online used car seller Carvana, have seen remarkable gains despite having a substantial number of their shares being shorted. In fact, Carvana’s stock has surged over 1,000% this year, despite facing short-selling pressures.
For investors who prefer a more reliable investment strategy, exploring stocks with solid growth potential might be the way to go. It’s worth noting that most meme stocks often receive bearish views from Wall Street analysts. According to FactSet, the consensus target price for Carvana, for example, is 32% lower than its current level.
However, there are heavily shorted stocks that Wall Street actually views optimistically. This presents an intriguing opportunity for potentially outsized gains. If these analysts’ projections hold true and stock prices rise, the short sellers would be forced to repurchase shares to cover their losses, which could amplify the rally.
Recently, ‘s examined stocks with high short interest and identified those with consensus target prices – the average projections of at least 10 analysts – that were more than 10% above the current levels. Interestingly, many of these stocks are considered undervalued by Wall Street.
Take electric vehicle company Fisker, for example. Despite an 80% decline in its stock price this year and nearly half of its floating shares being shorted, analysts predict that it could double its current value in the coming year. Other stocks with similarly positive outlooks include chemical processing and welding firm Frontier Group, solar panel companies Sunnova Energy International, and EV charging station operator ChargePoint.
While the contrasting views from analysts and short sellers might present an opportunity for some investors to take a bold bet, it’s important to recognize that this is not a game for the faint of heart.