Short-selling isn't necessarily the stuff of a great long-term investment strategy. However, in a market environment like the current one, where opportunities are few and far between, looking for short-squeeze candidates isn't exactly a crazy idea.

With that as the backdrop, here's a closer look at three stocks with better-than-average potential for short-squeeze rallies.

1. Sirius XM Holdings

The doubts surrounding Sirius XM Holdings (SIRI -0.23%) are understandable -- on the surface. When its service was launched back in 2002, satellite-based radio had no peers or rivals. The mainstreaming of broadband connections and the subsequent creation of online radio stations didn't take shape until after Sirius (but before its merger with XM) got going. But it was soon a clear threat as an alternative to traditional radio. It's only become more of a threat in the meantime, particularly given how most of us now carry around a wirelessly connected broadband device in our pockets.

What the bears that have sold 197.4 million SIRI shares short -- about 28% of the float -- don't seem to fully appreciate, however, is that Sirius XM's draw isn't really about its technology. Its satellite-supplied audio feeds are simply a means to an end. This company's strength has been and remains the quality of its programming and the caliber of its on-air talent. Yes, Howard Stern is arguably the single biggest reason customers love their service, but he's not the only reason 32 million people pay a monthly fee for access to its lineup. Professional sports coverage, dozens of music station genres, comedy, news, and myriad podcasts all contribute to a great, affordable product that would be difficult (if not impossible) to recreate any other way.

That being said, rather than fighting the threat that online radio brings to the table, Sirius XM is actually embracing it. Don't forget, this company also owns Pandora and makes its SiriusXM content available to subscribers via the internet just as easily as it pipes it into people's cars.

It will never be a high-growth name, mind you. This is a business built from the ground up to drive recurring revenue and add subscribers when and where it can. But what a reliable business! This year's projected top-line growth of 4% is pretty typical, and the company has only failed to grow its top line in one quarter since 2010. That was the second quarter of 2020 when the COVID-19 pandemic was ripping across the world.

2. Upstart Holdings

Anybody that's been keeping tabs on Upstart Holdings (UPST 0.90%) probably already knows it's been an easy, opportunistic target for short-sellers of late. The stock's down more than 90% since October's peak, with short-sellers themselves doing much of that driving over the course of that nine-month stretch. As of the latest tally, one-third of the company's publicly traded shares are shorted. That's huge, roughly quintupling the stock's short interest as of October.

And to be fair, at least a portion -- maybe a large portion -- of that pullback is deserved. The stock soared too high through most of 2021 anyway, and the company's earnings warning issued last week only exacerbated the market's effort to right-price the stock.

However, the sellers arguably overshot their target.

There's still work to be done here. The beating, however, doesn't reflect the fact that not only is this young company already profitable, but the stock is now undervalued. Shares are only priced at 2.5 times Upstart's trailing-12-month revenue and less than 14 times this year's projected per-share profits. The stock is only valued at 11.0 times next year's earnings projection from analysts, who collectively say next year's earnings should be up 25% year over year thanks to nearly 30% worth of projected revenue improvement.

The company's guidance may have dialed back expectations, but even so, those revised expectations still call for huge growth.

Upstart Holdings offers lenders a better way of determining a potential borrower's creditworthiness. Rather than reducing an individual to a mere credit score based on a narrow set of financial factors, Upstart uses an artificial intelligence algorithm to figure out how likely someone is to pay back a loan. The end result is more approvals and fewer defaults than the approach most lenders currently use, which is why this company is still growing so well despite its current headwind.

3. Big Lots

Finally, add discount retailer Big Lots (BIG 0.93%) to your list of heavily shorted stocks that could experience a short-squeeze rally in the foreseeable future.

Yes, this is the same Big Lots that botched its first quarter, suffering a steep, surprising loss on disappointing revenue -- a misstep that wasn't mirrored by any of its peers or competitors. The company cited inflation as the culprit and, to a lesser degree, lingering supply chain headaches. Those are believable explanations too, but investors' bearish response to them is understandable all the same. Knowing what's wrong and being able to fix it are two very different things. And to their credit, investors seemed to sense this trouble was brewing a while back. Last month's sell-off linked to the lackluster first-quarter report only accounts for a fraction of the near-70% slide from last year's highs.

In the same way it happened with Upstart Holdings, though, Big Lots' bears have arguably taken their short-selling much too far. A whopping 38% of its outstanding shares are now shorted, while the same can be said for 69% of its float. That makes it one of the market's most-shorted tickers, in turn leaving it ripe for a short squeeze. It just needs the right trigger to get the ball rolling.

That trigger could easily take shape in the form of a shake-up that bolsters next year's expected top-line growth and swing back to profitability. Big Lots' Chief Merchandising Officer Jack Pestello was terminated following last quarter's poor results. While it's a tough time to add even more turbulence to its operation in the form of a major management change, it's a move that may set the stage for a much-needed overhaul that ultimately drives better-than-expected sales growth.