GameStop's (GME -6.14%) unprecedented rally last year, which was largely driven by a massive short squeeze, caused some investors to seek out other heavily shorted stocks to buy into in hopes of netting similar gains. However, such stocks are also usually heavily shorted because they have fundamental problems -- so it's easy to catch a falling knife with this risky strategy.

Today, I'll take a look at three heavily shorted stocks -- Bed Bath & Beyond (BBBY), Beyond Meat (BYND 0.49%), and Upstart Holdings (UPST -2.78%) -- and see if they could be short-squeeze candidates.

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1. Bed Bath & Beyond

Bed Bath & Beyond's stock price has tumbled more than 70% over the past five years as its sales declined and its gross margins shrank. It struggled to keep pace with Amazon, Walmart, and other large retailers, it failed to adequately expand its own e-commerce marketplace, and it inherited more problems by acquiring other struggling retailers like Cost Plus World Markets and Christmas Tree Shops.

Its longtime CEO Steven Temares was ousted in 2019 by an activist investor-led revolt, and his successor Mark Tritton was dismissed this June after failing to turn around the struggling retailer. Ryan Cohen, one of the company's biggest backers, also liquidated his entire stake in August, and its CFO Gustavo Arnal unexpectedly passed away the following month.

Its interim CEO, Sue Gove, hatched a plan in late August to close about 150 of its weaker namesake stores, lay off a fifth of its workforce, raise $500 million in fresh capital, and sell up to 12 million new shares in an at-the-market offering to strengthen its balance sheet. Yet analysts still expect its sales to decline through fiscal 2024 (which will end in February 2025) as it continues to bleed red ink. That's why 37% of its outstanding shares were still being shorted as of Sept. 14.

Bed Bath & Beyond won't go bankrupt anytime soon, but it will probably bleed out slowly as the macroeconomic and competitive headwinds continue to throttle its sales, boost its inventories, and crush its margins. Therefore, a short squeeze probably won't happen until a few more meaningful catalysts appear.

2. Beyond Meat

Beyond Meat went public in May 2019, but its stock declined nearly 90% over the past three years and now trades well below its IPO price. The plant-based meat producer initially grew like a weed as restaurants and retailers lined up to sell its products. However, the pandemic disrupted its growth as restaurants closed down and reined in their orders.

The bulls expected Beyond Meat's sales to bounce back after the pandemic lessened, but inflation smothered out that recovery as shoppers pivoted back toward cheaper animal-based meat products. As a result, the company now expects its revenue to grow just 1% to 12% this year, compared to its 14% growth in 2021 and 37% growth in 2020. It also remains deeply unprofitable and hasn't actually proven that its business model is sustainable.

As Beyond Meat's growth stalls out, more competitors -- including Impossible Foods, Tyson Foods' plant-based meat division, and Kellogg's upcoming spin-off Morningstar Farms -- have been splitting up the stagnant market. It's hard to see how Beyond Meat can simultaneously stabilize its growth, expand its margins again, and fend off those rivals.

That's why about a third of Beyond Meat's outstanding shares were still being shorted as of mid-September. But just as with Bed Bath & Beyond, I don't expect anything short of a takeover bid to trigger a meaningful short squeeze.

3. Upstart

Upstart became one of the market's hottest growth stocks after its IPO in December 2020, but it now trades just slightly above its initial public offering price of $20 a share. The fintech company initially dazzled investors with its alternative approach to approving loans, which analyzes non-traditional data -- such as a customer's educational history, area of study, GPA, standardized test scores, and work history -- to produce a clearer view of the applicant with artificial intelligence-powered algorithms.

Upstart's website promotes loans, but its lending partners -- which include banks, credit unions, and auto dealerships -- traditionally fund those loans. Those lending partners pay Upstart fees for accessing its platform and the loan applicants it evaluates.

This lightweight strategy sounded disruptive, but rising interest rates caused serious headaches for Upstart as its lending partners turned cautious and reined in their loan assumptions. As a result, analysts expect its revenue to rise just 6% this year -- compared to its staggering 264% growth in 2021 and its 42% growth in 2020.

That slowdown forced Upstart to start funding some of its loans from its own balance sheet (instead of passing the risk on to the lenders) earlier this year. That abrupt reversal of its original business model, along with its declining profits and elevated debt-to-equity ratio of 1.5, attracted the bears and resulted in 30% of its shares being shorted as of mid-September.

Upstart's near-term future looks grim, but I believe it has a better shot at a short squeeze than the two other stocks because its growth could accelerate again once interest rates cool off. In other words, it mainly faces macroeconomic headwinds instead of internal problems -- and it could continue to grow over the long term as lenders look beyond traditional credit-rating services.