3 Most Heavily Shorted Stocks Primed for a Squeeze
There are investors who follow very specific investment strategies. A good example is several investors or funds just focusing on initial public offerings. Similarly, I have seen investors who focus entirely on turnaround stories. In the recent past, there has been an army of Reddit users who have targeted heavily shorted stocks for a squeeze. This seems like another interesting strategy and has delivered results.
The short squeeze rally in stocks like GameStop (NYSE:GME) and AMC Entertainment (NYSE:AMC) will go down in the books of financial history. And I must mention here that GME stock looks primed for another squeeze.
It’s also important to note that a short squeeze can be in stocks that are purely speculative. It can also be in stocks that seem fundamentally sound but have a near-term negative build-up. This column will focus on heavily shorted stocks that look good from a fundamental perspective.
Let’s talk about the reasons to be positive on these three heavily shorted stocks that look primed for squeeze.
3 Most Heavily Shorted Stocks: Skillz (SKLZ)
With 30.8% of the free float shorted, ZKLZ stock is among the heavily shorted stocks.
SKLZ stock has already corrected from highs of $46.3 to current levels of $17.0. It seems that the worst of the decline is over and the stock is primed for a squeeze.
The markets have been concerned about Skillz’s growth. The company reported monthly active users of 2.7 million for the first quarter of 2021. On a year-on-year basis, MAUs were essentially the same.
However, the company reported 92% revenue growth, which was driven by an 81% increase in monthly paying users. At the same time, the average revenue per user nearly doubled on a y-o-y basis. Therefore, there are several positives that can trigger stock upside.
With the initial public offering, the company has ample financial flexibility to increase marketing and sales spending. Further, Skillz plans to launch in India later this year. If MAU growth improves in the coming quartets, the stock is likely to surge higher.
The company’s adjusted EBITDA loss widened in Q1 2021. However, that’s not a concern if marketing expenses translate into strong user growth. Over the next few years, the company seems positioned for healthy EBITDA and cash flows.
Airbnb (ABNB)
ABNB stock is also among the heavily shorted stocks that looks positioned for a squeeze. It’s worth noting that “half of US states have fully vaccinated at least 50% of adults.” With gradual reopening of the economy, the demand for travel and tourism is likely to increase. This positions ABNB for upside in the foreseeable future.
From a stock price action perspective, ABNB stock had touched a high of $220 in February 2021. The stock has already witnessed a deep correction to current levels of $134. With possible industry tailwinds, a short squeeze seems likely.
My view on recovery is underscored by the fact that Q1 2021 revenue increased by 5% on a y-o-y basis. Additionally, revenue for the quarter also exceeded Q1 2019 revenue (pre-pandemic) levels. The company’s adjusted EBITDA also improved significantly due to cost reduction initiatives.
Another indicator of the positive trend is the average lead time for bookings in Q1 2021. This was at par with Q1 2019. Another growth trigger is the increase in active listings for non-urban areas. These listings are more popular with guests currently and growth in listings increases the company’s revenue potential.
Overall, ABNB stock seems positioned for upside with a worst over for the industry. It’s likely that the company will report positive adjusted EBITDA in the next few quarters. This will serve as a key stock upside trigger.
Shorted Stocks: Petco Health and Wellness (WOOF)
WOOF stock currently has 30.1% of short interest as a percentage of free float. However, considering the company’s growth outlook, the stock looks primed for a squeeze.
For Q1 2021, the company reported revenue growth of 27% to $1.4 billion. For the same period, the company acquired 1.2 million new net customers. This was the third consecutive quarter where more than one million customers were acquired.
It’s also worth noting that the market for pet care was worth $109 billion for FY2020. Over the next five years, the market size is expected to increase to $157 billion. Therefore, there is a big addressable market and this is likely to ensure that healthy growth sustains.
From a financial perspective, the company reported a positive free cash flow of $68 million for Q1 2021. For the comparable period last year, FCF was negative.
With positive FCF, the company is well-positioned to deleverage. Another important point to note is that the company’s comparable sales increased by 28% in Q1 2021. If comparable sales growth remains strong, it’s likely that EBITDA margin will continue to improve.
On the date of publication, Faisal Humayun did not have (either directly or indirectly) any positions in any of the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modelling. Faisal has authored over 1,500 stock specific articles with focus on the technology, energy and commodities sector.
