Since the beginning of the year, the big story on Wall Street often hasn't been the pandemic. Rather, the buzz has been about the retail movement and the desire to seek out the next short squeeze.
In simple terms, short-sellers are investors betting on a lower share price. Since a company's share price can't go below $0, gains are capped at 100% for pessimists. Conversely, given that there's no theoretical ceiling as to how high a stock's share price can fly, losses for short-sellers are unlimited. A short squeeze is a very short-term event that involves short-sellers rushing for the exit at once. To exit their position they'll need to buy shares, which only further exacerbates the potential runaway upside in a publicly traded company.
The thing about investing for a short squeeze is that it's usually a poor strategy with few winners. Stocks with high short interest are often struggling businesses and rightly worth avoiding. Although the following five heavily short-sold stocks are all potentially on the short-squeeze radar for retail investors, I wouldn't expect a squeeze out of any of them.
Even though electric vehicle (EV) stocks have been a favorite among millennial investors, Nikola (NKLA -3.85%) has attracted quite the following of pessimists. As of the end of June, more than 44.2 million shares were held short out of 191.3 million shares in its float. But this is the perfect example of a stock where pessimism is warranted.
Despite there being room for plenty of EV manufacturers in the U.S. and abroad, Nikola has frequently broken Wall Street's and investors' trust. The company exaggerated the technological capabilities of its Nikola One electric semi truck, and its founder, Trevor Milton, stepped down from his role as executive chairman in a middle-of-the-night tweet.
What's more, the Securities and Exchange Commission is also conducting an investigation into Nikola on the heels of a short-seller report from Hindenburg Research last year. Some of the allegations in that report were confirmed by a Nikola internal review.
Building an EV company from the ground up is a difficult and cash-consuming process to begin with. Adding a public relations nightmare on top of it all makes this stock an easy avoid and likely kills its chances of a short squeeze.
Though young investors love cryptocurrencies and virtually anything related to crypto, short-sellers have piled into cryptocurrency mining stock Riot Blockchain (RIOT -3.55%). There were roughly 20 million shares held short at the end of June, which compares to a tradable float of 72 million shares.
Mining for Bitcoin (BTC -2.17%) might sound like a winning strategy, but it comes with three major flaws. To begin with, Bitcoin has undergone three separate corrections of at least 80% over the past decade. Since mining companies are paid via block rewards (6.25 Bitcoins, at the moment), they're entirely reliant on the rising price of Bitcoin to push revenue and profits higher, rather than innovation.
Secondly, the barrier to entry for cryptocurrency mining is nonexistent. Over time, Riot is going to face increasing competition to validate groups of transactions, known as a block, on Bitcoin's blockchain.
The third issue is that Bitcoin's block rewards halve every four years. By 2024, the block reward will halve again to 3.125 Bitcoin from 6.25 Bitcoin. Essentially, crypto mining stocks like Riot Blockchain are competing for a shrinking pie, and they're entirely dependent on external factors. That doesn't sound like the recipe for a sustainable business model.
While most investors are rooting for clinical-stage biotech stocks to succeed, short-sellers have been piling on Inovio Pharmaceuticals (INO 1.86%). By the end of June, approximately 44.6 million shares were held short, relative to a tradable float of 206 million shares.
On one hand, Inovio has an impressively large pipeline consisting of 11 different clinical-stage compounds. On the other hand, the company has been in business for more than four decades and it's yet to develop a therapy that's been approved by the U.S. Food and Drug Administration (FDA). Inovio always seems to offer promise, but it's consistently failed to deliver.
Another reason for skepticism is the company's experimental coronavirus disease 2019 (COVID-19) vaccine, INO-4800. Though it initially looked as if Inovio would be a vaccine frontrunner in the U.S., the FDA placed a partial clinical hold on its phase 2/3 study and requested additional info on the vaccine and the company's delivery device, Cellectra. Months later, the U.S. federal government pulled funding for the company's proposed late-stage study, forcing it to seek an international trial.
Even though anything could happen during clinical trials, skeptics are historically batting 1.000 with Inovio.
A company with exceptionally high short interest that I don't believe has a realistic shot at a short squeeze is electric vehicle (EV) charging equipment and network provider Blink Charging (BLNK). As of June 30, 12.2 million shares were held short, compared to a float of 36.1 million shares.
As with Nikola, there's plenty of hype surrounding EVs and EV infrastructure, and there'll no doubt be winners. But Blink Charging is unlikely to be one of the winners, primarily because it's not investing any of its capital into research and development, at least based on what I (and you) can see from reading its quarterly 10-Q filings. Innovation is paramount when it comes to EVs and EV infrastructure.
There's also virtually no barrier to entry when it comes to EV infrastructure. There's nothing specific about Blink's charging equipment or its networks that implies it'll be the go-to for green-focused cities and auto manufacturers.
Currently on pace for a meager $12 million in full-year sales (per Wall Street), yet still lugging around a $1.3 billion market cap, Blink Charging is a good candidate to be pulverized by short-sellers.
Last, but certainly not least, is enterprise analytics software provider MicroStrategy (MSTR -1.00%). This high-flying company has a very small float of only 7.78 million shares, of which 2.14 million are currently held short.
To be blunt, MicroStrategy is a software company in name only. That's because CEO Michael Saylor has seemingly ignored his company's analytics operations in favor of buying Bitcoin. As of June 21, Saylor's company owned 105,085 Bitcoins, with an aggregate cost of $2.741 billion (about $26,080 per Bitcoin).
As I alluded earlier, Bitcoin has a tendency to enter protracted bear markets where it loses 80% or more of its value. It's already retraced about 50% from its all-time highs earlier this year. The issue is this: The bulk of MicroStrategy's funding to buy Bitcoin has come from issuing debt. In other words, Saylor has put his company billions of dollars into debt to buy an unproven, highly volatile asset.
In addition, the company's enterprise software sales have declined for six consecutive years. You'd think the CEO would be focused on turning a tangible business around. However, Saylor seems to spend more time promoting Bitcoin on Twitter. Suffice it to say, MicroStrategy is unlikely to squeeze its short-sellers out of their positions.