Regardless of whether you're relatively new to investing or if you've been putting your money to work in the market for decades, there's always something new to learn and see on Wall Street.
Last year, it was the unprecedented uncertainty of the coronavirus pandemic that whipsawed the major U.S. indexes in both directions. In 2021, it's all about retail investors and their quest to find the next short squeeze.
Short-squeeze mania takes over Wall Street
Beginning in mid-January, predominantly young and/or novice investors began banding together on community platforms like Reddit to seek out companies with high levels of short interest. The goal for these investors has been to create a short squeeze -- i.e., an event where short-sellers, who want to see the share price of a security fall, feel as if they're trapped in their positions and need to head for the exit. Because closing a short position necessitates buying shares to cover it, a short squeeze can greatly encourage the upside momentum in a stock.
There were dozens of short squeezes effected in a three-week stretch between mid-January and the early part of February. However, none have been more memorable or created a more loyal following within the Reddit community than video game and accessories retailer GameStop (GME 1.12%) and movie-theater chain AMC Entertainment (AMC 0.45%).
Although retail investors remain adamant that both GameStop and AMC will squeeze significantly higher in the foreseeable future, the dynamics that supported their mid-to-late January surges are no longer present. Short interest in both companies have declined from where they were months earlier, and higher average daily trading volumes will make it easier for potentially panicked short-sellers to find an exit.
Long story short, GameStop and AMC aren't good candidates for a sustainable short squeeze in May.
This trio of high-growth stocks may squeeze next
On the other hand, there's a trio of high-growth companies with the right combination of catalysts. Keeping in mind that a short squeeze alone should not be the basis of your decision to invest in a company, these stocks look primed for short squeezes in May.
Despite small-cap stocks being especially popular for short squeezes, it's megacap stay-and-hosting platform Airbnb (ABNB -1.68%) that might offer one of the best shots at a pessimist-crushing rally in May. Approximately 19 million shares of the company's 109 million-share float are currently held by short-sellers, and it would take an estimated four days to completely cover these shares if pessimists were to get scared.
Beyond just having the right recipe for a short squeeze -- reasonably high short interest relative to float and a high short ratio -- Airbnb has three other catalysts in its sails.
First, the U.S. and global coronavirus vaccination campaigns are underway. In the U.S., almost 38% of the adult population is fully vaccinated, and close to 55% of the adult population has received at least one dose. These vaccinations are key to reaching herd immunity, which will encourage people to travel. Given the incredible amount of pent-up travel demand, Airbnb should shine in a post-pandemic world.
Second, the company is likely going to report its quarterly operating results in the next three or four weeks (it's yet to officially set a date as of the time of this writing). Airbnb's sales were already showing signs of improvement in the fourth quarter and could handily surpass Wall Street's expectations, especially when compared to the unprecedented uncertainty that reared its head toward the end of Q1 2020.
Third and finally, Airbnb has a network effect that traditional hotels simply can't match. As noted by my colleague Jon Quast, a mere 9% of Airbnb's users booked a stay through the first nine months of 2020 because of an ad. The remaining 91% chose Airbnb because they're familiar with the company/marketplace. All of this gives the company a shot to burn short-sellers in May.
A second growth stock with the potential to soar higher on the back of a short squeeze is ad-tech company PubMatic (PUBM 1.93%). The company's cloud infrastructure platform allows for the bidding and optimization of digital ads across multiple platforms, and it had 2.93 million shares held short as of mid-April. That compares to a current float of 7.23 million shares. Based on its average daily volume of roughly 700,500 shares, it would take more than four days for pessimists to fully exit their positions.
Similar to Airbnb, earnings could represent the catalyst that sends PubMatic flying. When the company delivered its first quarterly report as a public company on Feb. 23, shares catapulted higher by 31% the following day. This was on the heels of the company reporting 64% year-over-year sales growth and net income of $0.34 per share, which topped the consensus on Wall Street by $0.04. A repeat performance may be in the cards.
PubMatic should also benefit from more robust ad spending as the U.S. and global economy open up and businesses begin putting their digital ad dollars to work. Between 2019 and 2024, global digital ad spending is expected to grow by an annualized rate of 10% to $526 billion. More specifically, mobile programmatic ad spend, digital video programmatic ad spend, and connected TV/over-the-top programmatic ad spend are expected to grow by respective annual rates of 11%, 17%, and 11% between 2020 and 2025. PubMatic finds itself at the center of a no-brainer growth opportunity.
There are clear competitive advantages for this $2.6 billion company, as well. The company's specialized cloud infrastructure is designed to allow for real-time programmatic advertising transactions. In English, it means the pricing on its platform is highly transparent, it's capable of covering multiple ad formats and devices, and it's helping to improve the return of investment for digital advertisers. There's a reason PubMatic offers a potentially sustainable 20% growth rate through mid-decade.
The third and final high-growth stock that looks to have a decent shot at squeezing short-sellers in May is esports and gaming company Skillz (SKLZ -0.45%). As of mid-April, 45.3 million shares were held short out of a float of 254.2 million shares. With an average daily volume of around 18 million shares, it would take a little over 2.5 days for short-sellers to completely exit their positions.
Unlike Airbnb and PubMatic, Skillz isn't expected to report its operating results in May. Rather, its biggest driver just might be money-manager Cathie Wood. The leader of ARK Investment Management has been gobbling up shares of Skillz as the stock has fallen. While no money manager is perfect, Wood's track record over the past two years has been incredible. Her recent purchases of Skillz's stock could send short-sellers running for the hills.
If you want something more tangible than "Cathie Wood likes it," take a closer look at the operating platform. Instead of going head-to-head with some of the biggest gaming companies in the world, Skillz chose the path less traveled to become a platform for gamers and developers.
Gamers get to compete against each other for cash prizes, while Skillz and developers get to keep a cut of the cash. Since the company is maintaining its platform and not having to spend big bucks on game development, its gross margin in each of the past two years was a whopping 95%.
Want another catalyst? How about the company signing a multiyear agreement with the National Football League (NFL) in early February. This deal will allow developers to create NFL-themed games that'll begin appearing on its platform either late in 2021 or early 2022. With the NFL Draft occurring this past week, interest in the most-popular sport in the U.S. is about to pick up.
Skillz is an absolute growth juggernaut that could quadruple its sales by 2024. It's not exactly cheap at 20 times estimated sales this year, but it could easily surprise Wall Street and pessimists.