In the first few weeks of 2023, the rise of risk-on assets (including cryptocurrencies) confirms that you don’t want to make any assumptions about short-squeeze stocks. True, on an elemental basis, securities that attract an unusual volume of bearish pressure point to negative sentiment. Otherwise, the specter of unlimited liability would keep most rational traders away from low-probability short trades.
However, as the events of the post-coronavirus era have proven, it’s possible that some securities may face too much pessimism. In these cases, irrespective of underlying fundamentals, the target companies may skyrocket in value. If that happens, these short-squeeze stocks can utterly ruin portfolios, causing divorce papers to fly. Therefore, it’s best not to mess around with short trades unless you know that you know.
Now, in my opinion, bearish hedge funds may have overdone it with their pessimism toward certain companies. Below are the short-squeeze stocks that pose dangers for anyone thinking about going negative on them.
Big Lots (BIG)
On paper, I can understand why bearish traders identified Big Lots (NYSE:BIG) as a candidate for “negative” profits. As investment resource Gurufocus.com warned, Big Lots may be a possible value trap. Sure, it features a subterranean price-to-sales ratio of 0.09 times. Unfortunately, with recent revenue trends pointing in the wrong direction, the low ratio represents a warning, not an encourager.
As well, the analysts have a lot to say about BIG stock, with few of the talking points positive. Currently, experts rate BIG as a consensus moderate sell. Moreover, the average price target of $13.75 implies a downside of roughly 20%. Therefore, you wouldn’t necessarily think BIG would be one of the short-squeeze stocks.
However, Big Lots provides discounts for consumers by offering bulk purchase opportunities. While I’m not saying that BIG represents a great investment by any means, it’s risky to go all-in on the short trade. Presently, BIG features a short interest of 53.52% of the float and 7.6 days to cover.
Translation? This is one of the short-squeeze stocks that can get out of hand.
Warby Parker (WRBY)
From an immediate perspective, it’s easy to appreciate why Warby Parker (NYSE:WRBY) rates “highly” among bearish traders. Specializing in retailing discount eyewear and contact lenses, Warby Parker offers a great idea for the consumer marketplace. Unfortunately, the financials could use some work. Most conspicuously, the company suffers from deeply negative profit margins.
As well, WRBY’s market performance rates very poorly. In the trailing year, shares fell nearly 47%. Since its first public day of trading (which is different from its initial offering price), WRBY dropped almost 70%. Despite the pessimism, bearish traders may have forgotten about Warby’s cynical catalyst.
Globally, myopia trends demonstrate a rising dynamic. Roughly speaking, by 2050, half of the world’s population could suffer from varying degrees of myopia. Longer term, then, Warby enjoys an extremely large total addressable market. Even now, myopia trends favor Warby’s discount eyewear business. So, with WRBY featuring short interest of 52.72% and 12 days to cover, it’s also one of the short-squeeze stocks that can get out of hand.
Clear Secure (YOU)
In warning about short-squeeze stocks that can go awry for prospective bears, Clear Secure (NYSE:YOU) presents a tricky narrative. Financially, the biometric travel document verification system provider features rough financials. Sure, its balance sheet pings decently, particularly with a strong cash-to-debt ratio. However, it suffers from deeply negative profit margins.
Another factor to consider is that Clear Secure apparently annoys U.S. travelers to no end. Basically, Clear members enjoy the benefit of skipping ahead of airport security lines. However, as Slate pointed out, this arrangement presents massive problems because mobility represents a Constitutional right. Therefore, a private company interfering with federal protocols raises more than a few eyebrows.
Therefore, I fully understand why not many people appreciate Clear Secure or YOU. Still, with more people willing to travel as Covid-19 fears fade, YOU ranks among the risky short-squeeze stocks. With a short interest of 51.46% and 14 days to cover, YOU can skyrocket, burying you alive.
Beyond Meat (BYND)
For both financial and fundamental reasons, I can appreciate why the bears target plant-based meat provider Beyond Meat (NASDAQ:BYND). At the same time, it risks going awry for the pessimists as one of the short-squeeze stocks. On the financial front, Beyond Meat sucks – I don’t know how else to put it. Gurufocus.com warns that it’s a possible value trap. Unfortunately, the company carries a poor balance sheet that indicates severe distress. Unsurprisingly, the business incurred much red ink in terms of profit margins.
Against the fundamentals, plant-based meats ring up too high of a price at the cash register. Much of this has to do with unfavorable economies of scale compared to animal-meat providers. Still, we must also appreciate that millennials and members of Generation Z increasingly embrace the plant-based lifestyle. While BYND features a consensus moderate sell rating, it’s also possible that much of the downside has been written in. With a short interest of 43.4% and 9.3 days to cover, BYND’s one of the short-squeeze stocks to approach carefully.
Sonic Automotive (SAH)
Naturally, with rising interest rates, auto dealership Sonic Automotive (NYSE:SAH) doesn’t appear a compelling idea. Therefore, from most perspectives, shorting SAH appears to make sense. However, prospective traders must watch out – I think it’s one of the short-squeeze stocks that can hurt the bears.
How so? While it’s not the greatest time to buy a new (or new-to-you) vehicle, Murphy’s Law doesn’t care about the economy. In other words, when your car breaks down, you might find it more financially viable to fund a replacement rather than a repair. Moreover, the Wall Street Journal noted that cars on U.S. roadways reached an average age of 12.2 years, a record.
By logical deduction, older cars on the road translate to more mechanical failures. Again, because of the financial proposition undergirding the repair-versus-replacement conundrum, SAH might start rising this year. Indeed, you’d think SAH would be a stinker but in the trailing year, it’s up 3%. Further, with a short interest of 38.22% and 13.9 days to cover, SAH is one of the short-squeeze stocks to be careful about.
Geo Group (GEO)
When it comes to warnings about short-squeeze stocks, from a moral perspective, I appreciate why bears hate Geo Group (NYSE:GEO). As a private prison, Geo Group effectively profits from other people’s misery. Sure, the incarcerated are paying their debt to society. However, I’m not entirely sure shareholders should be profiting from such an endeavor. Just call it bad juju.
Anyways, GEO also seems way overpriced relative to its price-earnings-growth ratio of 46.7 times. Also, its price relative to tangible book value ranks well in the stratosphere for the industry. Just for good measure, Gurufocus.com’s proprietary calculations for fair market value indicate that GEO pings as significantly overvalued.
Oh, and its Altman Z-Score of 1.3 indicates a distressed business. Still, prospective bearish traders should note that GEO may rate as one of the short-squeeze stocks. Basically, the folks that are taking the opposite side of the trade don’t care about the morality of private prisons. Emboldened with successes in other risk-on assets, you need to be careful here. Featuring a short interest of 37.53% and 10.5 days to cover, it might be best to watch from the sidelines.
I know that the insurance-technology platform Lemonade (NYSE:LMND) isn’t everybody’s cup of tea. Frankly, Lemonade’s financials could use a lot of work. On the surface level, one of its best attributes is its so-so balance sheet. And yes, the company enjoys tremendous growth. However, it’s not profitable. And insurance companies if they’re anything are profitable.
But would I short LMND? No, and the reason is that the enterprise represents a few tweaks from being a true contender. Let’s face it, the underlying industry features inelastic demand, especially during the post-Covid period. People recognized the importance of protecting their financial well-being, thus bolstering Lemonade’s insurance business.
As well, the company caters to young users, speaking their language of digitalization. Once broader economic conditions improve, people may adopt Lemonade on a great scale. Therefore, it’s risky to bet against LMND. It’s easily one of the short-squeeze stocks that can go awry for bears, particularly with short interest of 25.69% and 12.7 days to cover.
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.