While many heavily shorted stocks bring more danger than potential upside, there are always a handful of intriguing short squeeze candidates among them.
A short squeeze is an investing phenomenon in which many investors bet against a stock (hold it short) yet have to close their positions en masse due to positive news or a rising share price. This mass exodus of short-sellers generally prompts a spike in share price over the short term -- creating interest among investors looking for profits.
Even better than these possibilities, however, are short squeeze candidates with encouraging longer-term prospects. One company that fits this bill is direct-to-consumer (DTC) eye care specialist Warby Parker (WRBY 0.71%).
Let's examine why this short squeeze hopeful may offer more than just a temporary share price pop.
Warby Parker's high float short percentage
Whenever the number of shares sold short grows beyond 10% of its total shares outstanding, a stock can generally be considered "heavily" shorted. With 15% of total shares held short, Warby Parker easily meets this threshold.
What makes the short squeeze case even more interesting in Warby Parker's case, however, is that its percentage of float shares held short is a much higher 70%.
A company's float is the shares available to investors to actively trade -- essentially removing restricted stock and shares held by insiders and some institutions. Therefore, in Warby Parker's case, the vast majority of its actively traded shares are being shorted, creating the opportunity for a jump in share price.
Furthermore, the company's days-to-cover ratio is around 13, adding more fuel to its short-squeeze potential.
You can find this 13-day figure by dividing Warby Parker's short interest by its average volume over the last 30 days. This number highlights that if these sellers all moved to cover their shorts, it would be difficult (and costly) to do so as there are not enough shares being actively traded to avoid seeing a spike in share price.
Reimagining the eyewear industry
With more than 2 million customers, Warby Parker has developed an incredibly loyal customer base in a rather unlikely industry. The company boasts an incredible 80 net promoter score, placing it in elite territory for having the happiest customers.
Net promotor score is rated on a scale of negative 100 to 100 and is used to show how likely an existing customer would be to recommend a company's product to someone, with a positive number considered good -- making Warby Parker's figure tremendous.
Leading this customer loyalty is the company's unique objective of vision for all -- which is why it donates a pair of glasses to someone in need for every pair it sells. Further amplifying this noble motivation is Warby Parker's status as a Public Benefit Corporation (PBC).
This structure means that rather than primarily being focused and committed to its shareholders, Warby Parker must act in the best interest of all its stakeholders. Simply put, Warby Parker's focus goes beyond providing glasses to its customers at the lowest price possible through its DTC sales channel to provide vision for others, too.
Promising growth potential, now 70% lower
Following its 2021 initial public offering, Warby Parker's stock has been on a steady march downward, accumulating a higher short interest as it goes.
Despite decelerating growth rates driving this decline, the company still posted 14% sales growth and a 9% increase in members year over year for the second quarter of 2022.
Perhaps most importantly to investors, the company's $573 million in sales over the last four quarters only account for a little more than 1% of the $44 billion eyewear market in the United States. This small percentage leaves Warby Parker with ample potential for market share gains as it continues to build off its incredibly loyal customer base and grow its overall brand awareness.
Furthermore, the company is still in the early stages of building its broader omnichannel sales experience. Currently operating 178 optical stores, Warby Parker aims to grow its footprint to over 900 stores for the long haul. These physical stores are important as the business looks to become a one-stop shop for anything in the optical care realm, be it eye exams, contacts, or simply getting to hold a new pair of glasses you like.
As investors look ahead, it will be crucial to watch Warby Parker's stock-based compensation as a percentage of revenue.
Already at 26% of the company's total sales, this stock-based compensation will need to be reined in over time for Warby Parker to realize any true profitability.
Ultimately, an investment in Warby Parker today is more of a bet on its unique vision (sorry) for the future than its current financials. However, its short-squeeze potential and wildly loyal customer base combine to create a one-two punch for upside over the short and long-term time horizons.