A short squeeze is when traders who heavily short a stock start to cover their short positions by buying back the stock. This increases demand for the stock, and it pushes the price higher, forcing other short sellers to buy back. The more a stock is shorted, the bigger the squeeze when it happens.
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.
Carvana Co.
Carvana Co. (NYSE: CVNA) is an online used car retailer that lets you fully complete the process of purchasing, including trade-in and financing, without physically going to the car dealership. The company is based in Tempe, Arizona, and it’s the fastest-growing online used car dealer in the US.
Picks for you
This car retailer is among the top five most-shorted stocks, with 41% of float shorted, as of August data. The stock has already squeezed the shorts, and it’s up 998% year-to-date.
Despite that, Morningstar’s quantitative equity report has put a fair value estimate of $104 per share. That’s 108% above the current market price of $50. If the price goes that high, the short squeeze would be epic.
The stock had recently pulled back to $36 after trading at $57, but it quickly rebounded. The reason behind the rebound was the purchase of $116 million worth of shares by the company’s CEO, Ernest Garcia. He bought over 3 million Class A Units at a price of $37.048 per share on August 18. When insiders buy the shares, that’s typically a bullish sign.
ProKidney Corp.
ProKidney Corp. (NASDAQ: PROK) is a clinical-stage biotech company focused on cell therapy platforms for treating chronic kidney diseases using patients’ own cells.
Being a biotech company, it’s not surprising that the stock has 37% of float shares shorted, making it one of the top 10 shorted stocks. That’s because biotech companies rarely have an approved product to sell, which makes them a high-risk investment.
However, Morningstar’s equity report places a 68% higher value than the current market price of $8.64 to $14.52. The price has never traded at Morningstar’s fair value, though.
The company recently reported that its Q2 had a $38.8 million operating loss.
Both Carvana and ProKidney have outperformed the S&P 500’s 18% return year-to-date, with the first returning 998% and the second 25%.
Buy stocks now with Interactive Brokers – the most advanced investment platform
Disclaimer: The content on this site should not be considered investment advice. Investing is speculative. When investing, your capital is at risk.
