Wall Street traders have numerous (and often creative) strategies to speculate on stocks and their up and down price movements. There are times when the prices of stocks are influenced more by what these traders do rather than by the company's business operations. One popular strategy favored by the market bears involves selling a stock "short."
Short sellers can have a big impact on a stock's valuation. When there's a lack of bullishness around a stock, high short interest can send a company's shares into an endless tailspin. Three stocks with high short interest right now are Novavax (NVAX 3.54%), Beyond Meat (BYND 0.95%), and Upstart (UPST 2.76%). Each of these stocks trades down at least 85% from their 2022 prices.
Another market strategy can push a stock price higher exponentially through a coordinated effort that "squeezes" the short sellers. Can any of these three stocks prove their doubters wrong, and potentially become short-squeeze candidates in the near future? Let's see.
1. Novavax
Novavax's business faces some serious headwinds. Demand for COVID-19 vaccines isn't shaping up to be terribly strong, with rivals Moderna and Pfizer both posting underwhelming numbers of late. And with no other products to rely on for growth, Novavax's financial situation isn't looking great. Earlier this year, the healthcare company raised going-concern issues, essentially saying that it may not be able to survive.
That situation doesn't appear to be improving, either. For the three-month period ending Sept. 30, Novavax's operating loss totaled $125.6 million, which wasn't a whole lot better than the $127.2 million loss it incurred in the same period last year. A more pressing issue, however, relates to cash flow. As of the end of September, the company's cash and cash equivalents totaled $651 million -- slightly less than half of the $1.3 billion it reported at the end of last year. That's a considerable amount of cash burn in a short period, and without a way to stop its losses, Novavax faces a tough road ahead.
Short interest as a percentage of Novavax's float is at 45%, and it's hard to see a scenario where the company can turn things around anytime soon. I wouldn't count on a short squeeze here, as Novavax's business faces big problems ahead. Investors are better off steering clear of this stock entirely.
2. Beyond Meat
Another stock with a similar level of short interest to Novavax is Beyond Meat (45% of float). Investors are also betting heavily that it will fail. And there are valid reasons to expect that the company will continue to face challenges. Although Beyond Meat has multiple products, the problem is that it's not making money off of them.
Beyond Meat's net sales for the period ending Sept. 30 totaled $75.3 million, which was down 9% year over year. And even the products that it's selling aren't selling at high enough margins. The cost of goods sold totaled $82.6 million for the period, which means that it is costing the company more to make the products than it's selling them for. Unfortunately, low and even negative gross margins are not a new problem for Beyond Meat.
The company is in a tough situation because if it raises prices it risks destroying demand further. But at the same time, lowering prices or maintaining the status quo isn't doing the business any favors, either. This is another long-shot stock that I wouldn't count on proving its doubters wrong anytime soon. Beyond Meat simply hasn't proven that its business works and that it can be profitable. And until that happens, investors should stay away from this highly risky investment.
3. Upstart
The lowest short interest on this list belongs to Upstart at just under 41% of its float. It's also struggling with declining demand -- Upstart reported net revenue from fees totaling $146.8 million for its most recent quarter, which ended in September. That's down 18% from a year ago. Its net loss of $40.3 million, however, was more modest than the $56.2 million loss Upstart reported this time last year, as the company has been slashing its operating expenses.
In a rising interest rate environment and amid concerns about a possible recession next year, lenders just aren't eager to issue loans. Even though Upstart uses artificial intelligence (AI) to help lenders make smarter decisions by evaluating more data points, that just isn't proving to be enough of a reason to keep demand strong on its lending platform.
But Upstart Holdings appears to be the most likely candidate for a short squeeze next year. It goes back to interest rates. It's unclear which direction the economy will go in next year, but if there's a quick recession that triggers rate cuts, that could be the catalyst that gets investors bullish on a stock such as Upstart, which is sensitive to interest rates. And if investors are simply expecting rate cuts, that may be enough of a reason for some bullishness to drive up Upstart's share price.
This is still a risky stock to hold, but it does have the greatest likelihood of the three stocks on this list to possibly experience a short squeeze. For most investors, this might still be too risky of an investment to consider. But if you're willing to take on the risk, Upstart could be an attractive contrarian investment -- as is evident with the excitement around AI stocks this year, there may be a lot of bullishness around Upstart's business once economic conditions improve.
