Recent days have been marked by enormous losses measured in billions that short-sellers have endured due to the spike in prices of meme stocks.
The most notable examples are GameStop (NYSE: GME) and AMC Entertainment (NYSE: AMC), which surged by more than 100% in value in just a few trading sessions.
The short squeeze has prompted investors to look for other short-interest targets that could spike in value and thus potentially replicate the gains that AMC and GME stocks brought to investors.
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According to various sources that compiled a list of stocks with a market cap greater than $50 million and a short interest higher than 30%, several stocks may be potential targets of short squeeze.
Considering that the high level of short interest is deemed to be above 20%, all of these stocks have the potential to undergo a short squeeze with SunPower Corp (NASDAQ: SPWR), Bowlero Corp (NYSE: BOWL), and Children’s Place (NASDAQ: PLCE) being the most vulnerable.
How does a short squeeze work?
Short sellers anticipate a stock’s decline and borrow its shares to sell, aiming to profit by repurchasing them at a lower price later. However, if the stock unexpectedly rises instead, short sellers must swiftly cover their positions to minimize losses.
This involves buying back the shares at a higher price, resulting in a surge in buying activity that further drives up the stock’s price. A sudden increase, fueled by new buyers and short sellers rushing to cover their positions, can lead to a rapid and unprecedented price surge.
GME stock is the most notable example
Shares of GME stock surged 688% in 2021. Individual investors coordinated a buying spree using online message boards in the video game retailer’s shares.
The buying surge surprised the short sellers, who were betting the stock would fall. These ‘shorts’ faced unlimited losses unless they bought the stock, further fueling gains.
It was an innovative but controversial way to push GME stock higher, with the target set at $100 this time.
However, Gamestop stock fell 22% since the markets opened minutes after Roaring Kitty made a post with the Grim Reaper knocking on a door that says ‘Gamestop,’ possibly marking the end of the surge.
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Disclaimer: The content on this site should not be considered investment advice. Investing is speculative. When investing, your capital is at risk.
