If you’re looking for some sort of investing edge, short squeezes seem to have become in vogue this year. These trading phenomena are a big part of the reason names like GameStop and Bed Bath & Beyond raced higher, if only temporarily, earlier this year. Now, some investors are on the hunt for more of the same — or even attempting to make them happen.
To this end, here’s a closer look at three stocks with unusually high short interest right now and all potentially subject to a streak of artificially induced buying. As to whether you should try to take advantage of them is another question — and perhaps best left to professional investors.
But first things first. What the heck is a short squeeze?
What’s a short squeeze?
If you don’t know, a short squeeze is the rapid unwinding of short positions in a particular stock. A short trade is the antithesis of a conventional stock trade meant to buy low and then sell high. Rather, short-sellers sell a stock they don’t own in anticipation of being able to buy it at a lower price at some point in the future. Yes, it’s completely legal.
Image source: Getty Images.
It’s also incredibly risky. The risk of simply buying and owning a stock can be significant, but at the very least it’s limited to the amount invested in a particular position. The worst-case scenario is that stock loses all its value. That’s in contrast with short-selling. The risk of a short trade is effectively infinite in that there’s no cap on how high a stock’s price can go. And the only way to close out a short position is by buying it back to cover the shares you’ve already sold. It’s just a matter of price.
This is where the “squeeze” premise comes into play. Think of it as a chain reaction. The higher a stock climbs, the more nervous short-sellers become. If enough of them get nervous at the same time, they all start buying the stock to cover their short position — buying that only drives that stock higher, causing other short-sellers to become similarly nervous enough to buy those shares to cover their short trades, and so on.
Oddly excessive doubt
Nearly every publicly traded stock has some degree of short interest — that is, shares of its public float held as short trades. But some tickers are much more heavily shorted than others. Among the names with high short interest right now are Corsair Gaming (NASDAQ:CRSR), Beyond Meat (NASDAQ:BYND), and a video-gaming content platform called Skillz (NYSE:SKLZ). For these stocks, 35%, 31%, and 25%, respectively, of their share floats are currently shorted. For perspective, Meta Platforms‘ short ratio is 1% while GameStop’s has been pared back to 15%.
Doubt about these stocks makes a fair amount of sense. Take Corsair Gaming as an example. While it’s one of the leading video-gaming accessory brands, last quarter’s revenue of $391 million was not only down 14% year over year but fell short of estimates as well. The company also cautioned…