10 Stocks That Could Squeeze Short Sellers, Including CGC
Short selling, or selling borrowed shares of a stock with the hopes of buying it back later at a lower price, isn’t easy. In theory, short sellers can experience unlimited losses due to a “short squeeze.†For bears in stocks with heavy short interest, having your position squeezed represents a serious risk.
In a short squeeze, better-than-expected news can lead a stock higher, which forces short sellers to cover their trades. If there are too many short sellers (or too few shares), it may trigger a margin call that sends the stock higher. Theoretically, a short squeeze can cause equities to outrun their fundamentals, moving the price much higher and sending shorts running for cover.
For that some reason, some investors screen for stocks with heavy short interest as potential contrarian buying opportunities. Even large-cap bull plays such as Alibaba (NYSE:BABA) and Tesla (NASDAQ:TSLA) often rely, at least in part, on short-covering as a potential catalyst.
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These 10 stocks all qualify as heavily shorted shares. By this definition, all 10 stocks to buy in this list have at least 20% of their float sold short, providing fuel for a squeeze.
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All admittedly have some risk, which is why short-selling traders have targeted these stocks in the first place. All ten have the potential for bullish catalysts that could squeeze the shorts and create big gains for investors willing to take the other side of the trade.
10 Stocks Set Up for a Short Squeeze: RH (RH)
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High-end furniture retailer RH (NYSE:RH) has been an epic battleground stock for several years now. For most of the past five years, over 20% of the company’s shares have been sold short — a figure that now sits at 34%. RH itself has countered by buying back $1.25 billion in stock in the last two years, which helped ignite an enormous rally from $20 in early 2017 to $160 in the middle of last year.
Since then, however, the shorts have been on the right side of the trade. RH stock trades at an 11-month low and has dropped 38% from its 52-week high. As Luke Lango detailed last month, RH stock looks intriguing at these levels.
Valuation is attractive, with RH trading at less than 11x next year’s EPS estimates. The company’s efforts to drive membership and build out high-end restaurants appear to show early results.
The housing market and macro worries have had an impact, but at least in the near term, demand seems like it should remain at least stable. There’s a solid fundamental case back near $100. And with short interest still above 30%, it may only take one good quarter to send RH soaring again.
Brinker International (EAT)
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Like RH, Chili’s owner Brinker International (NYSE:EAT) has tried to fend off shorts in part by repurchasing shares. This decade alone, Brinker has reduced its share count by over 60%.
But Brinker’s strategy hasn’t been quite as effective. EAT stock actually is down about 15% over the past five years, and including dividends, shareholders over that period have roughly broken even. And short sellers are taking increasing aim at the company, with roughly one-third of the float sold short at the moment.
There is a seemingly solid short case here: I’ve actually sold the stock short myself, and I called EAT stock “toxic†last year. That said, Brinker has shown some signs of life lately. A slimmed-down menu has improved service and back of the house efficiency. Same-restaurant sales are improving. Food delivery represents a new potential revenue stream. And Brinker shares are cheap, with a forward P/E close to 10x and a dividend yield of 3.6%.
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There are risks here, with a large debt load (driven in part by those share repurchases) and worries that consumer tastes are moving away from casual dining chains. But with such a large short float, and expectations low, a few more quarters like that last two could cause shorts to move on – and potentially push EAT back to recent highs above $50.
Canopy Growth (CGC)
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The most valuable marijuana stock, Canopy Growth (NYSE:CGC) unsurprisingly has attracted its share of short sellers — 35% of the stock’s float is sold short.
To be sure, Canopy has a relatively thin float: only a little over one-third of its shares are freely traded. Notably, Constellation Brands (NYSE:STZ, NYSE:STZ.B) owns nearly 40% of the company after investing $4 billion last year. Still, short sellers have targeted CGC — and surprisingly so given recent history.
After all, smaller pot play Tilray (NASDAQ:TLRY) saw an epic short squeeze last year. And while CGC isn’t going to see the same type of run — at one point, TLRY doubled in four sessions — more good news for the company, or more optimism toward the industry, could lead to a rush to a crowded exit.
CGC already has had a good 2019, perhaps aided by short covering. There are enough traders still betting against Canopy Growth to keep the stock moving higher if the company, and the industry, keep posting impressive growth.
SecureWorks (SCWX)
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Cybersecurity provider SecureWorks (NASDAQ:SCWX) has about 30% of its float sold short … but here, too, the size of the float amplifies the role of short sellers. Dell Technologies (NASDAQ:DELL) owns some 85% of SecureWorks, meaning only a small slice of the available shares actually are traded.
That thin float makes SCWX ripe for a short squeeze, and it’s possible the stock already has seen a squeeze this year. Starting in late January, SCWX moved from $16 to $24 in just two weeks on essentially no news. The stock has given back some of the gains, driven in part by somewhat disappointing Q4 earnings, but there’s still room for another spike higher.
There’s also an intriguing growth story here. I called out SCWX as a cybersecurity stock to watch back in early April. The sector is hot, and SecureWorks seems to have carved out an attractive niche in threat detection and response. In this market, and in that industry, a 3x price-to-revenue multiple is reasonable and leaves room for upside.
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With shorts potentially trapped if SCWX starts to move, it wouldn’t take much for the stock to make another big run.
LendingTree (TREE)
Source: Shutterstock At this point, LendingTree (NASDAQ:TREE) looks like a trade, not an investment. But for investors willing to take the risk, the gains could be impressive.
After all, TREE stock has made huge moves in recent years. It spent most of 2016 hovering around $100. After the U.S. presidential election (amid a roaring bull market), TREE took off. It touched $400 in late 2017, in part because 32% of shares outstanding were sold short at the beginning of the year. Twelve months later, roughly two-thirds of those shorts had capitulated.
TREE gave back a good chunk of its gains last year, however, falling 50% at one point. But the rally has resumed: the stock has nearly doubled just since mid-December. And short interest is rising again.
From a fundamental standpoint, TREE admittedly looks potentially overvalued at 40x 2020 consensus EPS estimates. But the chart looks attractive and 25% of the float is currently sold short.
That’s a lot of traders that will need to cover if the rally keeps going. Nimble traders, then, might see TREE as an ongoing squeeze and make a bet that 2019 will wind up looking much like 2017 did.
BlueLinx Holdings (BXC)
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