People love fast action; it's human nature. Perhaps that's why short squeezes get so much attention from investors.
A short squeeze occurs when short-sellers rush to cover their positions on a stock. The sudden rush of buying can quickly push a stock price higher. Some stocks made headlines two years ago when they quickly soared from squeezes.
After a tough market year in 2022, some stocks have built up large short-seller followings, potentially priming the pump for a new wave of short squeezes. Remember that chasing short squeezes is risky. With that said, here are three stocks with short squeeze potential to keep your eye on.
1. Bed Bath & Beyond
Well-known home goods retailer Bed Bath & Beyond (BBBY) has fallen on hard times. The company's having trouble paying its debts and has already closed stores and sought deals with creditors to free up liquidity. However, the company has steadily warned that its efforts to stop bleeding cash haven't succeeded.
Short-sellers smelled the blood in the water, and have been piling into the stock over the past year. Shorting has picked up recently, with 45% of all outstanding shares sold short. It's been reported that the company is working with liquidators to prepare for a potential bankruptcy filing.
The high level of short-seller interest could generate volatility in the share price, and any sniff of news that Bed Bath & Beyond will avoid bankruptcy could send shorts rushing to cover their positions. However, as this is a company seemingly on its deathbed, approach cautiously.
2. Silvergate Capital
Cryptocurrency bank Silvergate Capital (SI) has been hit hard by the ongoing crypto bear market. Cryptocurrency institutions, including the now-bankrupt FTX exchange, would deposit interest-free funds into Silvergate, which would turn around and invest the deposits into bonds to make money on interest.
But banking is essentially a confidence play, and collapsing exchanges have plagued the cryptocurrency space as fearful investors have pulled their funds. Silvergate's deposits dried up overnight, causing significant losses in the fourth quarter. In recent months short sellers piled on, shorting 62% of outstanding shares.
The future is a bit cloudy for Silvergate, though the company has survived to this point. Any positive developments, including increased confidence in the crypto market, could send shorts to cover their position. Investors should closely follow management for clues on how Silvergate might proceed.
3. Carvana
E-commerce car dealer Carvana (CVNA) was a big winner in 2020 and 2021, but has since plummeted. Low interest rates made debt cheap, which Carvana used to grow its business. However, the company hasn't been able to turn a profit, and now rising rates and slumping used car prices are creating an uphill battle for the company.
Carvana may have to raise new capital by issuing shares given the company's $7.4 billion in long-term debt and dwindling cash pile of just $316 million. Short sellers have steadily increased their presence, shorting over half of the company's outstanding shares.
The stock has nearly tripled from its lows, so Carvana has seemingly felt the squeeze already. But given the stock's remaining high short interest, there could be more volatility ahead. Investors would likely be severely diluted if the company issued shares to raise funds, which would only further play into the hands of short sellers. Hence, the stock remains very risky despite its recent momentum.
