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3 Heavily Shorted Stocks You Might Actually Want to Own

By Rick Munarriz - Jan 30, 2021 at 8:05AM

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Short-sellers are getting squeezed out of good and bad companies. Let's take a look at some of the good ones.

The GameStop (GME 6.81%) saga has taken some wild turns this month, and the volatility wouldn't be possible if it wasn't for heavy short interest. The video game retailer was a popular short for hedge funds -- the number of shares shorted exceeded GameStop's public float. 

The problem here is that this company's fundamentals are weak and getting weaker with every passing year. Once the market gets past the "stick it to the man" garnish, this will be a stock that could be almost as dangerous to own on the way down as it was to short on its way up.

That said, there are dozens of other stocks out there that have more than 25% of their floats sold short, and they're not all companies whose best days are in a 2012 time capsule. Among the more than three dozen stocks on that list with market caps above $2 billion, I see Stitch Fix (SFIX 3.62%), SmileDirectClub (SDC 2.82%), and fuboTV's (FUBO 9.35%) as three names worth owning.

A man in a suit with a suitcase open and money flying out.

Image source: Getty Images.

Stitch Fix

It's easy to be down on Stitch Fix at a time when the country's in the midst of a recession that's bacon-wrapped in a pandemic. Getting a stylist-curated wardrobe update may be the last thing on your mind when you're working, learning, and (of course) living at home, and rarely out in social settings. However, Stitch Fix is apparently hotter than your suddenly unfashionable skepticism.

Naysayers have had three chances to course-correct here. When Stitch Fix's sales declined a mere 9% in its fiscal third quarter -- which ended in early May and covered the darkest stretch of the pandemic shock -- it was time to give it some credit. When revenue rose 3% in the subsequent quarter ending in August, it was clear a turnaround was in play. Three months later, in its report on the first quarter of its fiscal 2021, it was back to double-digit top-line growth, and Stitch Fix is offering up a rosy outlook for the balance of its fiscal year. If this company found a way to grow through the latter half of 2020, that momentum is going to be hard to stop as we head back out into the world more. Short interest is a third of Stitch Fix's public float.

Someone putting SmileDirectClub aligners in place.

Image source: SmileDirectClub.

SmileDirectClub

No one likes crooked teeth, but wearing braces to rectify the situation isn't a very savory proposition for adults' pocketbooks or social calendars. Clear dental aligners have emerged as the superior teeth straightener, offering folks a more convenient and cost-effective path to achieving a better smile. Align Technology's (ALGN 3.54%) Invisalign has been the market leader in this niche, and investors were treated to 10 years of double-digit revenue growth before the company proved itself to be mortal in 2020.

Spunky smaller player SmileDirectClub is riding those coattails, and it's growing even faster than Align. 

SmileDirectClub sells discounted clear dental aligners directly to consumers. That's angering dentists and orthodontists who have partnered with Invisalign, but this only means that it was a disruption waiting to happen. It's also attracting the interest of skeptics, who have currently shorted 27% of its float.

SmileDirectClub hasn't turned the corner on last year's troubles as quickly as Stitch Fix has, but when revenue declined 7% in its latest quarter -- with analysts modeling a 19% year-over-year drop -- it got investors who were long on the stock smiling again. The latest round of stimulus checks should also help boost SmileDirectClub's business, especially since the best time for dental makeovers is when folks are still spending a lot of time at home. 

A family watching a soccer game on TV in their living room with a grass turf area rug.

Image source: Getty Images.

FuboTV

We're streaming a lot of video these days. Cord-cutters are replacing their cable and satellite television services with live TV streaming platforms, and fuboTV is emerging as a popular choice for sports fans. Its base of premium subscribers exploded from 316,000 to 545,000 in 2020. 

Even fuboTV can't keep up with its growing popularity. It boosted its year-end subscriber goal in October, then again in November, and still exceeded its target. Revenue growth is accelerating, too. FuboTV's top line soared 71% in 2020's third quarter, and its preliminary financial results suggest it grew by between 77% and 83% in the fourth. 

The bears are growling here, arguing that fuboTV can't compete in this cutthroat niche against tech giants, telecoms, and media behemoths. A whopping 75% of its public float is currently being sold short. The rub here is that fuboTV's subscribers are already spending an average of four hours a day on the platform. It's generating $7.50 a month per subscriber on advertising, and that's on top of the subscriptions that start at $64.99 a month. Armed with a pair of recent fantasy sports and gambling acquisitions, it expects to up the ante on the sports wagering front with its growing audience in 2021. The game is just getting started here.

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Stocks Mentioned

StitchFix Stock Quote
StitchFix
SFIX
$8.59 (3.62%) $0.30
SmileDirectClub, Inc. Stock Quote
SmileDirectClub, Inc.
SDC
$1.46 (2.82%) $0.04
fuboTV, Inc. Stock Quote
fuboTV, Inc.
FUBO
$3.51 (9.35%) $0.30
Align Technology, Inc. Stock Quote
Align Technology, Inc.
ALGN
$284.57 (3.54%) $9.74
GameStop Corp. Stock Quote
GameStop Corp.
GME
$137.21 (6.81%) $8.75

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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