Before the novel coronavirus pandemic upended our paradigm, financial advisors bemoaned that millennials and Generation Z were falling behind prior generations regarding achieving certain financial milestones. Suddenly, though, the public health crisis incentivized everyone to look to the market for wealth enhancement. Amid this baptism of fire, one trading tactic has been emblematic of this development than any other: speculating on highly shorted stocks.
While you shouldn’t view this write-up as a comprehensive discussion, here’s the gist of this unexpectedly popular concept. Ordinarily, investors buy shares of publicly traded companies in the hopes that the value of their holdings rise. However, bearish traders can take the opposite angle, gambling that underperforming or overhyped organizations will fail. Those equity units that feature significant short interest are termed highly shorted stocks.
Of course, because securities represent equity ownership of a real business as opposed to a play on an unknown outcome, you can’t directly bet against shares. Instead, you borrow shares for the purpose of an immediate sale. From there, you wait until the share price falls in value, then buy back the amount borrowed at a discount. Finally, you return the highly shorted stocks back to the lender and you pocket the profits.
Sounds simple, except there’s one catch. It’s always possible that highly shorted stocks rise in value. If they continue rising, you theoretically expose yourself to unlimited liability since there’s no limit on how high a stock can go. Further, bulls can jump on a highly leveraged play in the hopes of sparking a short squeeze; a process that forces bears to buy back shares at a higher price since they can always go higher.
Moreover, the buyback action itself causes the underlying security to jump in value. All in all, bears that encounter a short squeeze are in for a rough day. On the flipside, the bulls can run away with spectacular profits, perhaps even lifechanging ones. Therefore, social media is abuzz regarding these most highly shorted stocks.
- Clene (NASDAQ:CLNN)
- Creatd (NASDAQ:CRTD)
- Marin Software (NASDAQ:MRIN)
- Arcimoto (NASDAQ:FUV)
- Workhorse Group (NASDAQ:WKHS)
- Blink Charging (NASDAQ:BLNK)
- Canoo (NASDAQ:GOEV)
Although the concept of the short squeeze is an appealing one — and has a track record of success — there’s zero guarantee that it will work when you decide to pull the trigger. Sometimes, going after the obvious trade results in disaster. Therefore, carefully assess these highly shorted stocks before thinking about going contrarian.
Highly Shorted Stocks: Clene (CLNN)
Specializing in therapeutic nanocatalysts to improve cellular bioenergetics, Clene is one of the most innovative pharmaceutical companies in the business. Its flagship clinical program focuses on addressing neurodegenerative diseases, such as multiple sclerosis, Parkinson’s disease, and amyotrophic lateral sclerosis (or Lou Gehrig’s disease).
It sounds great on paper. But the main challenge with CLNN stock and other advanced biopharma/biotechnology investments is that they’re aspirational. If it was so easy to cure chronic diseases and conditions, someone would have done so already. Given the explosion of net losses between the first quarters of 2020 to 2021, the bears probably sensed an easy profit-taking opportunity.
At time of writing, CLNN is tops in terms of highly shorted stocks, with a short percentage of float of 57%. That’s a staggering figure as anything into double-digit territory is problematic. Also, the short ratio (otherwise known as days to cover) is 5.76. Based on average trading volume, bears have a little over a week to cover their positions.
It’s possible that CLNN could jump higher because of the desirable combo of high short interest and days to cover (although the ratio isn’t that unusual, to be fair). Still, if you do go contrarian here, do so with extreme caution.
Everyone is looking for an edge these days, particularly now because of the devastation of the coronavirus pandemic. Creatd hopes to be the difference maker for its clients, which helps expand the influence of creators and brands through leveraging the company’s technologies and networks.
On surface level, Creatd sounds like an intriguing concept. Certainly, it’s a relevant one given how much social media dictates the public discourse on myriad topics. Nevertheless, the problem for Creatd is that it’s in the early stages of development. Frankly, investors are looking at its expanding net losses and low sales — it only generated revenue of $1.21 million last year — as potential pitfalls.
Therefore, it’s not terribly surprising that CRTD is one of the heavily shorted stocks available. In fact, as I write this, it ranks as the second-most bearish equity unit, featuring a short percentage of float of just under 52%. Usually, that’s a recipe for disaster.
So, should speculators pounce on this trade? Before you do, consider that CRTD stock only has a two days to cover. That gives bears ample wiggle room to cover their positions relatively quickly if their circumstances go awry. Honestly, I’m not sure if I want to be involved in this one.
Highly Shorted Stocks: Marin Software (MRIN)
An e-commerce services related organization, one of Marin Software’s specialty is digital advertising solutions. Nowadays, this is a highly competitive field as data is really the new oil. Through advanced analytics algorithms, Marin can help advertisers pinpoint their target demographic’s consumption behaviors, leading to enhanced return on investment.
As with the other highly shorted stocks on this list, the headline prospectus for MRIN stock is incredibly attractive. But the problem — as with its peers — comes down to financial credibility (or lack thereof). In 2020, Marin Software generated revenue of just under $30 million, which translated to a year-over-year loss of 39%.
I’m sorry but when most businesses shifted to online channels because the pandemic forced them to, a 39% YOY revenue loss is not what investors were hoping for. Also, the company’s Q1 2021 revenue growth went negative as well, shedding 27%.
Put it all together and MRIN is one of the most heavily shorted stocks. The most recent read (June 30) pegs its short percent of float at nearly 48%. However, I would be careful about piling into the contrarian trade as Marin’s days to cover is only 0.68.
Having already jumped so high, you’ll probably want to avoid touching this one.
Despite the enormous popularity of electric vehicles and related businesses, this burgeoning sector has produced a litany of highly shorted stocks. I’m not saying anything one way or the other about this dynamic; I just find it utterly fascinating.
So, I’m going to dedicate the rest of this list to EV stocks that have attracted the bears, beginning with Arcimoto. Billed as a manufacturer of affordable, ultra-efficient, small-footprint EVs, Arcimoto seems like the perfect play on modern urban mobility. With its environmentally friendly profile, the brand aligns well with the current political climate.
Well, you know where this is heading. Though Arcimoto is endearing, it’s not producing the returns that stakeholders want. To be fair, the company enjoyed 2.2X revenue growth from 2019 to 2020. That’s awesome. But the issue is that nominally, the 2020 sales have amounted to less than $2.2 million.
Also, net losses continue to expand, from a loss of $1.35 million in 2015 to $18 million in the red for 2020. Therefore, FUV is one of the most highly shorted stocks, featuring a short percent of float of 39%. For the record, it’s the fourth-most shorted equity unit.
I’d say the short ratio is modestly high at just under 4. However, the sprouting of head-and-shoulder patterns (first between November 2020 through March 2021 and second early June to today) warrants caution.
Highly Shorted Stocks: Workhorse Group (WKHS)
Arguably the most popular name on this list of heavily shorted stocks, Workhorse Group was riding a wave of enthusiasm prior to the whole narrative going down like the Titanic. One of the three finalists competing for the U.S. Postal Service’s contract to replace its aging fleet of mail carriers, WKHS stock seemingly carried an unassailable advantage: the underlying company offered the only all-electric solution.
But remember what I said about betting on the obvious trade? Sometimes, perhaps even most of the time, it doesn’t work. Case in point is the most recent Home Run Derby. Everyone thought that pitching-slugging sensation Shohei Ohtani was going to win it all. Nope — he didn’t even make it out of the first round (not that it really matters).
With Workhorse, the reality was that other bids had their strong points as well. For instance, a super-efficient combustion-engine platform has economies of scale and proven track records going for it. Ultimately, as you know, Workhorse failed to secure the contract and WKHS stock quickly became one of the most heavily shorted stocks.
Currently, shares have a short percent of float of 35% and a short ratio of 1.15. Both fundamentally and technically, I don’t see the short-squeeze justification. If it were me, I’d pass.
Blink Charging (BLNK)
Blink Charging may be one of the most perplexing narratives in the present business landscape. Therefore, I’m not terribly surprised to see BLNK as one of the heavily shorted stocks. For those who love it or hate it, they each have strong supporting evidence for their opinions.
On the positive front, EVs are the future of personal transportation. With so many people making the switch (or considering it), the need for infrastructure should theoretically grow. Therefore, BLNK stock seems like a no-brainer.
On the other hand, EVs are still very expensive compared to their like-to-like combustion-engine counterparts. While many have made the transition, many more must do so before Blink can justify its expansionary strategy.
Of course, this is where investors are starting to get worried. While Blink delivered strong revenue growth in 2020, net losses expanded to nearly $18 million from a little under $10 million. Further, the red ink isn’t going in the right direction for Q1 2021.
Stats wise, we’re looking at a short percent of float of nearly 34% and a conspicuously sizable days to cover of 5.4. If you were purely banking on heavily shorted stocks, BLNK might do the trick, but likely only for a brief moment.
Highly Shorted Stocks: Canoo (GOEV)
Theoretically, because EVs have fewer moving parts than your typical combustion car, they should be easier to manufacture. So far, this concept hasn’t been proven wrong, with several EV firms sprouting up in recent years. One such organization is Canoo. Initially, the company attracted plenty of positive attention thanks to its skateboard platform.
Basically, from one platform, Canoo can develop several different EVs, catering quickly to changing consumer shifts in the automotive market. And while its flagship EV looks like a toaster with wheels, the company’s emphasis on serving millennials’ desire for experiences made the vehicle something to consider.
Unfortunately, stakeholders are having second thoughts about GOEV stock. Primarily, the company is largely a pre-revenue business so it remains to be seen whether it can gain traction with its key demographic. Thus, GOEV attracted considerable bearish attention, featuring a short percent of float of 33% and 4 days to cover.
Given that both metrics are reasonably favorable to spark a short squeeze, there might be some potential with Canoo shares. However, the company also arguably deserves the negative attention. I’d be careful if I were you.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.