What happened

Shares of Express (NYSE:EXPR), Revlon (NYSE:REV), and PetMed Express (NASDAQ:PETS) were jumping again as a massive short squeeze on consumer stocks continued into its third day.

The squeeze instigated by a group of traders on Gamestop has now spread to other heavily shorted stocks, including AMC Entertainment Holdings and Bed Bath & Beyond, in addition to the group of stocks above.

As of 12:13 p.m. EST, Express was the big winner of the bunch, up a whopping 202%, while Revlon had gained 26.2% and PetMed Express was up 20.7%.

A stock chart going up.

Image source: Getty Images.

So what

There was no news out on any of these three stocks today, and certainly nothing of the kind that would generate this kind of movement for fundamental reasons.

Instead, traders on platforms like Reddit have figured out that they can take advantage of heavily shorted small-cap stocks if enough of them start buying them, and that's what's happened with all three of these stocks. When a stock is shorted and starts to go up, short-sellers eventually have to buy back the shares or risk further losses, including a margin call forcing the repurchase.

Express, the struggling mall-based apparel retailer, has seen its stock go from a closing price of $1.17 on Jan. 21 to as high as $13.97, a gain of nearly 1,100% in less than a week. That kind of rally, especially in a stodgy retailer, is simply unheard of. The clear culprit is a short squeeze. Though only about 15% of the float is sold short, traders were aggressive to pump up the stock as daily trading volume rose as high as 358 million shares on Monday, up from around 3 million normally. As of midday today, volume had already topped 200 million.

Express' actual business has been hit hard by the pandemic with comparable sales down 30% in its recent quarter as it posted an operating loss of $110.9 million and continued to burn through cash. The business itself is no different than it was a week ago.

At Revlon, 31% of the stock's float was sold short as of the end of December. Like Express, Revlon had also been gaining earlier in the week, climbing 30% through the first two days of the week, and is now up about 75% over the last three sessions. And much like mall-based retailers, cosmetics companies have been struggling during the crisis as its revenue fell 20% in the third quarter and reported an operating loss of $9.7 million.  

Finally, PetMed Express, an online pet pharmacy, entered the new year with 41% of it stock sold short. That company has fared well during the crisis as pet adoptions surged early in the pandemic, and sales ticked up 10% in its most recent quarter. Nonetheless, a substantial percentage of investors still believe the stock will fall, continuing a run from earlier in the week. Over the last three sessions, shares of the pet products company have risen about 50%.

Now what

It's an understatement to call the current market environment bizarre. It's unclear when or how this will end, but it's a mistake for investors to try to jump on the bandwagon in a stock like Express, which has seen its value jump by 10 times in less than a week. That valuation is essentially being created out of thin air. Gamestop rose to a market cap of $25 billion from less than $1 billion not long ago, spurred on by extreme options buying, but that valuation simply isn't sustainable and a lot of traders will be left holding the bag.

Buyer beware.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.