Investors have to be really negative about a company's prospects to place big bets that its share price will sink. It seems logical that the smartest move is to stay away from such stocks.
However, intense short-selling can create opportunities when the negativity is overdone. Good news for a stock often results in a short squeeze where the share price soars as short-sellers scramble to cover their positions.
Such scenarios can sometimes be predicted in advance. Are these three companies next on the list for short squeezes?
1. Chewy
At first glance, you might not think that online pet products retailer Chewy (CHWY 0.45%) is all that great of a candidate for a short squeeze. Only 5.5% of the company's outstanding shares were sold short as of Nov. 15, 2022.
However, the more important metric to look at is what percentage of a stock's float -- the total number of shares available for public investors to trade -- is sold short. That number was nearly 39% as of the latest report.
Chewy's shares have fallen significantly this year. Investors have been worried about the potential impact of a recession on the company's sales. Some analysts have also warned that Chewy's growth will slow.
But those concerns could be off-base. Chewy's business continues to perform well. Its market opportunity remains enormous. Good news just might cause short-sellers to run for the hills.
2. Sirius XM Holdings
Sirius XM Holdings (SIRI 1.76%) stands out as another stock with a wide gap between the two most common measures of short interest. Its short percentage of shares outstanding was less than 4.7% as of Nov. 15, 2022, but the short percentage of float was north of 27.5%.
Despite these big bearish bets against Sirius XM, most investors haven't been so negative about the stock in 2022. Shares of the audio entertainment company have fallen only slightly year to date while the overall market has struggled.
Sure, Sirius XM has delivered disappointing earnings results in its last two quarters. The trends in the advertising market also don't look so promising over the near term. This risk is almost certainly a key factor behind why short-sellers have focused on the stock.
Signs that advertisers are increasing their marketing spending could be just what's needed to kick off a short squeeze for Sirius XM. However, it's possible that gradual improvement in the advertising market will allow short-sellers to cover their positions over time without a mad dash resulting in a squeeze scenario.
3. Trupanion
If you're looking for the best pet insurance companies, Trupanion (TRUP 3.13%) will be high on the list. The stock is also high on the list for short-sellers. As of Nov. 15, 2022, nearly 19.7% of Trupanion's outstanding shares and 24.3% of its float were sold short.
Betting against Trupanion has paid off throughout much of 2022. The pet insurer's shares have plunged close to 60% year to date.
Chewy actually caused some of Trupanion's decline. In October, the online pet products company teamed up with Lemonade Pet. This move was understandably viewed as problematic for Trupanion, which already had a partnership with Chewy.
However, Trupanion's business continues to perform relatively well. Revenue jumped 29% year over year in the third quarter of 2022. Operating margins have been pressured, but management believes that will improve next year. A positive surprise for Trupanion holds the potential to create a short-squeeze scenario for its stock.
