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.
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 (CRSR -3.35%), Beyond Meat (BYND -7.36%), and a video-gaming content platform called Skillz (SKLZ -3.20%). 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 investors that rising costs linked to the semiconductor shortage and the supply chain crisis will remain a problem for the foreseeable future.
Beyond Meat shares have not only fallen out of favor with the bulls that had so staunchly supported it over the course of the past couple of years but the stock's big gains logged last year have made it something of a target this year. It's down more than 60% from January's peak with short-sellers seemingly predicting the slowdown in demand we're seeing now. Sales of its goods on the once-hot U.S. market fell nearly 14% year over year during the three-month stretch ended in early October.
As for Skillz, while the video-gaming community appreciates the access it offers to esports events, that doesn't change the fact that the company's losses are growing at a faster clip than revenue is rising.
Put 'em on your radar
Of course, it's entirely possible the naysaying short-sellers have acted far too aggressively, setting the stage for a sharp bullish reversal for each of these tickers. But that's not a prediction that a short squeeze will send all -- or even any -- of these stocks higher.
Not only must the rhetoric surrounding these short-seller targets take a decidedly bullish turn, the majority of interested investors must be willing to act on that shift in rhetoric. That's no easy task in light of the vested interest so many short-sellers have in keeping these stocks moving lower. It also typically requires a strong news catalyst to start the unwinding of short positions that evolves into a full-blown short squeeze, which is also difficult to muster.
Still, shares of Corsair Gaming, Beyond Meat, and Skillz are sporting notably high levels of short interest, suggesting the bears may have perhaps taken things too far. The market rarely supports such extremes for very long, leaving these names at least vulnerable to a short squeeze. But again, keep in mind that this is a risky (not Foolish) way to choose stocks even by speculative standards. Most investors are probably best-served by leaving this kind of stuff to the pros.