But when these stocks unexpectedly surge, a ‘short squeeze’ unfolds, forcing traders to buy back shares at higher costs, potentially causing massive price spikes.
On November 9, Finbold analyzed the most shorted stocks, singling out two with the potential for significant growth in case of a short squeeze.
scPharmaceuticals (NASDAQ: SCPH)
Pharmaceutical stocks are often among those that attract high short interest. Such is the case with scPharmaceuticals (NASDAQ: SCPH), a company that focuses on subcutaneous, self-administration of IV-strength treatments in heart failure and infectious diseases.
According to data from financial information provider MarketWatch, 28.98% of SCPH’s float is currently being shorted by investors, amounting to more than 6.8 million shares. This means that a significant number of investors are placing bearish bets against the scPharmaceuticals, as can be seen from its year-to-date performance of negative 30%.
At the same time, such pessimism is not shared by analysts. Notably, the average 12-month price target for SCPH is $19.33, which is 295% higher than its current market price. This is based on price objectives offered by 6 analysts in the past three months.
In addition, the stock has a consensus rating of ‘Strong Buy,’ with all of the 6 strategists giving that same grade for SCPH.
If analysts’ bullish predictions begin to materialize and SCPH begins to recover, it could pave the way for a short squeeze in the stock as it would force investors who are shorting it to buy it back at a higher price.
Archer Aviation (NYSE: ACHR)
Meanwhile, another company that has a big portion of its share float shorted but is supported by analysts is eVTOL aircraft maker Archer Aviation (NYSE: ACHR).
At the moment, 29.18% of ACHR’s float is shorted by the market, or a total of 40.2 million shares. Compared to SCPH, Archer’s year-to-date performance is actually remarkable, at +185%. But in spite of that, it appears that a high number of investors are shorting the stock.
Analysts are quite bullish, on the other hand. The average 1-year price forecast for the stock is $9.83, implying a potential upside of more than 85%.
The consensus rating for the stock is ‘Strong Buy,’ based on 5 analysts who issued that rating in the past three months and 1 who suggested a ‘Buy.’
Given the substantial short interest, further extensions of ACHR’s 2023 rally would put short traders in an unfavorable position, possibly leading to a short squeeze that could significantly increase the company’s stock market gains.
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