The Most Heavily Shorted Stocks And 5 Short-Squeeze Ideas For 2023 (2023)

The Most Heavily Shorted Stocks And 5 Short-Squeeze Ideas For 2023 (1)

The stock market has staged an impressive rally to start the year, with the S&P 500 (SPY) up 5% already in 2023, and even 15% from its low point back in October. The setup here is based on an improving economic outlook as inflationary pressures dissipate with significant implications for everything from corporate margins to consumer sentiment, and the next steps in monetary policy.

Whether the Fed has one or two more rate hikes up its sleeve, it's clear the end of the uber-hawkish messaging is now on the horizon. The reality is that the macro backdrop is significantly improved compared to the first half of last year defined by extreme uncertainty.

The VIX is near a 1-year low while credit spreads have narrowed as important signals of stabilizing financial conditions. I can also bring up the U.S. Dollar sharply reversing its strength in recent months which was a major headwind for markets in 2022. Putting it all together, there may be more upside for stocks and risk assets as the narrative slowly comes around.

The Most Heavily Shorted Stocks And 5 Short-Squeeze Ideas For 2023 (2)

Short Squeeze Stocks

The thesis in my recent article described a possible catalyst for the next leg higher in stocks, which could see bears and doom-and-gloomers quietly throwing in the towel on predictions for the most apocalyptic economic scenarios.

Anyone that was counting on the December CPI to accelerate higher or recent labor market figures to suggest a collapsing economy as a reason for stocks to make a "big crash lower" is on the wrong side of the trade right now. Here are my words from last week:

The "pain trade" is up. Beaten-down names and high-growth stocks, in particular, may present the best opportunities as they reprice into an improving outlook. A market-wide short squeeze which is simply shorts covering their trades could end up surprising a lot of people.

Today I'm going a step further by presenting not only the most heavily shorted stocks but also five of my top picks from the group poised for a short squeeze. We're only considering stocks with a current market cap above $250 million.

First, some of the key observations from the list include several distressed companies and names that have faced particular challenges over the past year. This makes sense as short sellers are often attracted to companies with weak operating or financial trends by expecting shares to trade lower.

A high-short interest can also imply there is some underlying skepticism of a company's business model over the long run. Many biotech firms fall into this category, sometimes dependent on a drug still in development that may or may not ever reach the market.

For much of 2022, that strategy worked as the average heavily shorted stock on the list is down by 32% over the past year. On the other hand, the recent strength is telling with that same group also up on average 20% year to date as an indication of more positive momentum.

Carvana Co (CVNA) with over 86% of its float (referring to the proportion of shares available for trading by the public and not held by insiders), or 51% of common shares outstanding, reported short is the most heavily shorted stock in the market right now. This is a company where its online used-car sales platform got caught up with essentially overpriced inventory even as demand slowed compared to skewed pandemic dynamics. The company faces a real risk of bankruptcy and it's not a stock I can recommend.

That's also the case with Bed Bath & Beyond Inc (BBBY) where its brick-and-mortar retail model has been facing extinction for many years even before the pandemic. While it's unclear if the company will survive a restructuring, it's not a name we have much faith in for the long run. The downfall of BBBY can be traced to its lack of significant e-commerce presence and otherwise domination by Amazon.com Inc (AMZN).

In terms of stocks that have been gaining thus far in 2023, the main factor at play beyond the high-beta component is a view that there's a new path to deliver better-than-expected financial results. Wayfair Inc (W) appears to be in the middle of a real short squeeze with shares more than doubling from their low, gaining momentum following an announcement of job cuts and a profitability target. In many ways, Wayfair has delivered a blueprint for other stocks to follow into more bullish momentum.

Another key theme from the list above is the impressive rally in crypto-related stocks. The price of Bitcoin (BTC-USD) has climbed by more than 40% from the low which is giving many sector names like Coinbase Global Inc (COIN), MicroStrategy Inc (MSTR), and bitcoin miners like Marathon Digital Holdings Inc (MARA) or Riot Platforms Inc (RIOT) among others a new life. We're bullish on Bitcoin and the short-squeeze dynamic with bears chasing positions higher in crypto is part of the rally now.

5 Short Squeeze Ideas

The short squeeze ideas I like have a combination of not only a high short interest but also a fundamental angle with room for a more sustained turnaround to fundamentals, and surprising expectations to the upside. In the context of a broader positive market outlook through a sustained economic recovery compared to the headwinds in 2022, that proverbial rising tide can lift all the boats and heavily shorted stocks can lead higher.

1. EVgo Inc (EVGO)

  • Market Capitalization: $1.4B
  • Percent of Shares Float Outstanding Short: 36%
  • FY 2024 Consensus Revenue Growth: 206%
  • 2023 Consensus Earnings Growth: (negative EPS)

A global theme this year is the significant growth of electric vehicles on the road, including from manufacturers other than Tesla Inc (TSLA). Data shows nearly 6% of all vehicles sold in the U.S. in Q3 were electric, up from just 2% in 2020, with many new models launching from brands like Ford Motor Co (F), and General Motors (GM).

The other side of the equation is the necessary charging infrastructure. EVgo steps in as one of the leading operators of charging stations with over 2,600 stalls in operation. The outlook also benefits from federal and state government initiatives like the National Electric Vehicle Infrastructure Program, and credits within the Infrastructure Investment and Jobs Act of 2021 supporting funding for new locations and stations.

What I like about EVGO is that the growth is accelerating at the right time with 2023 revenue expected to jump by 206%. The stock has been beaten down based on a lack of profitability, although we believe pessimism baked into the share price has gotten extreme at the current level. A path to profitability sooner rather than later can make shares a runner going forward.

2. Cheesecake Factory Inc. (CAKE)

  • Market Capitalization: $2.0B
  • Percent of Shares Float Outstanding Short: 26%
  • 2023 Consensus Revenue Growth: 6%
  • 2023 Consensus Earnings Growth: 90% (FWD P/E 13.2x)

For much of 2022, Cheesecake Factory along with the broader restaurant industry became a high-profile victim of inflationary cost pressures and even a shortage of workers. The setup over the next few quarters should be improved margins as the conditions improve compared to a weaker first half of 2022 on the earnings side.

The case for the stock is that there is a good value at the current level with room for earnings to outperform expectations. Out of all the "upscale" fast-casual dining concepts, I'll go out on a limb to claim Cheesecake Factory is one of the better options and the extreme pessimism based on the high-short interest in the stock is simply unjustified. With CAKE already trading near a 1-year high, levels from 2021 above $50 can be a good first upside target.

3. Clear Secure Inc (YOU)

  • Market Capitalization: $4.3B
  • Percent of Shares Float Outstanding Short: 51%
  • 2023 Consensus Revenue Growth: 27%
  • 2023 Consensus Earnings Growth: 373% (FWD P/E 95x)

Clear Secure offers an identity verification platform that includes the "Clear" checkpoints as a separate line in the security process at 46 major airports. Members enrolled through the private biometric system get to save time by skipping the step where TSA agents check ID cards and boarding pass.

What's made the company successful with over 14 million enrollments is the several partnerships with credit card companies and airlines which have worked as effective marketing translating into impressive growth. For 2022, YOU is on track to reach a revenue of $433 million, up 70% year over year, benefiting alongside the recovery in air travel. Still, what I like about the stock is the earnings momentum with EPS expected to accelerate through 2023.

Shares of YOU have been consolidating for much of 2022 following a selloff from its 2021 IPO. While shares are trading at a forward P/E of 95x, we believe that this premium is justified and exactly the type of high-growth stock poised to lead the market higher. A pending breakout in shares above $30.00 could kickstart a short squeeze considering nearly 51% of the float is reported short. I'm bullish and expect YOU to be trading higher over the next several months.

4. Avis Budget Group, Inc. (CAR)

  • Market Capitalization: $1.4B
  • Percent of Shares Float Outstanding Short: 36%
  • FY 2024 Consensus Revenue Growth: 206%
  • 2023 Consensus Earnings Growth: (negative EPS)

As one of the world's largest car rental companies, a challenge for Avis Budget Group in 2022 was the period of record-high gasoline prices that pressured demand by keeping drivers off the road. The company also dealt with shortages of vehicles amid global supply chain issues. Nevertheless, the stock has managed to post a positive return over the past year based on resilient travel and rental car demand, which has likely been frustrating for short sellers potentially betting on a much weaker operating environment.

Fast forward, what we like about CAR is that many of those same headwinds from last year have now reversed including lower gas prices and normalizing vehicle prices which allows the company to efficiently manage its global fleet. Compared to rival Hertz Global Holdings (HTZ), CAR has a larger proportion of business outside the United States which is now benefiting from the weakening U.S. Dollar.

We believe CAR is well-positioned to outperform what is a low base of expectations over the next few quarters opening the door for the stock to retarget levels from the 2022 highs around $300 as a price target.

5. Canada Goose Holdings Inc (GOOS)

  • Market Capitalization: $2.2B
  • Percent of Shares Float Outstanding Short: 25%
  • FY 2024 Consensus Revenue Growth: 13%
  • 2023 Consensus Earnings Growth: 12% (FWD P/E 18x)

Everyone will be familiar with the premium outerwear brand of Canada Goose with its expedition parkas and the iconic "Arctic Program" patch that has crossed over into a fashion statement.

Getting past the inflationary cost pressures that hit margins deeply last year and pressured the stock, the message here is that the brand and company outlook is alive and well, in my opinion. The catalyst we see for shares over the next few quarters is an expected recovery from sales in Asia. Indeed, this is an angle we covered in a recent article explaining how the re-opening of China easing Covid restrictions is positive for Canada Goose as the country is strategically important for its growth outlook.

GOOS is trading near the highest level since August while there's a good case to be made that the outlook has improved significantly in the period since. The stock is trading at 18x forward earnings while it's possible that consensus EPS estimates may be too conservative with an upside to the top line. My new $30.00 price target implies a forward P/E of 25x could be on the table with room for earnings to smash estimates. The call here is that shorts should be looking to close their short bets on the company as the outlook for sales and earnings accelerates.

Final Thoughts

With a bullish outlook on stocks, heavily shorted names and losers from last year can evolve into 2023 winners. At the same time, I don't believe it will be a straight line higher and it's important to stay selective. The short-squeeze ideas above are centered around companies I believe are fundamentally strong, but there are still risks.

The ongoing Q4 earnings season is prone to generate some volatility considering high-profile reports from mega-cap companies still incoming. On the downside, a scenario where economic conditions deteriorate into a deepening recession, defined by surging unemployment or a resurgence of inflationary trends, would also force a reassessment of the bullish case. At the same time, the bulls have been winning over the last few months and it's a trend we expect to continue.

Editor's Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.

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