Traders and speculators often short a stock by borrowing a certain number of shares from a financial institution and selling it on the market with the goal to buy it back cheaper and profit from the difference.
When the stock price starts rising, short sellers may be forced to buy the shares back, thus increasing demand for the stock. This can quickly turn into a short squeeze where short sellers are ‘squeezed’ out of their positions, often at a loss.
This can be a profitable trading strategy, which is why Finbold analyzed the most shorted stocks this year and selected the two that have a high potential to take off this September.
Upstart Holdings Inc.
Upstart Holdings Inc. (NASDAQ: UPST) is an AI lending platform that partners with banks and credit unions to provide consumer loans. Upstart uses AI to predict creditworthiness based on metrics such as education and employment, which is useful for those who don’t have a credit score just yet.
The company shares are shorted for 32.36% of the float, making it one of the highest-shorted stocks as of August data.
Even though the stock has already seen a short squeeze from early May until the end of August this year, when it hit $74, there could be another squeeze around the corner.
Morningstar’s quantitative equity report has put a fair value estimate of $37.64 per share. That’s 23% above the current market price of $30.57. If this price is reached, we could see another attempt at the $50 price level. However, any move lower to $24 could increase the number of shorts.
Upstart reported its Q2 earnings in August where it beat estimates on earnings per share at $0.06 vs. a loss of $0.06. This is the third quarter out of the last four, where the company surpassed EPS estimates.
However, revenue was $135 million, a 40% drop from the same quarter last year, and fee revenue was $144 million, down 44% within the same period.
Groupon Inc. (NASDAQ: GRPN) is a global marketplace that connects consumers and merchants. This allows consumers to access special discounts and perks for a limited time by purchasing coupons via Groupon’s sites.
This company has 5.3 million shares shorted out of 16.7 million floating, which comes out to 32% of the float shorted.
Despite that, the stock has had a decent run since May this year, wiping out some of the shorts.
Morningstar’s equity report gives a $19 fair value, 57% above the current market price of $12.04. The last time GRPN stock traded at Morningstar’s fair value estimate was in 2022.
Windward Management unveiled an 8.9% stake in Groupon on September 7, encouraged by the new leadership this year. Windward sees Groupon stock trading at $55 over the next 12 months. This could happen given the number of shares shorted.
Groupon is up 35% year-to-date, while Upstart is up 137%, outperforming the S&P 500’s 16% return during the same period.
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