Short squeezes can rapidly produce huge gains for investors. As heavily shorted stocks climb, short sellers have to buy back the shares they bet against, causing the stock to climb higher and forcing other short sellers to buy the shares. So a tremendous, vicious — but potentially very positive — cycle is created.
On the other hand, trying to benefit from a short squeeze can be very risky if you arrive at the party too late. That’s because, as Benzinga pointed out, the fundamentals of the stocks that undergo short squeezes are often poor so short squeezes can quickly be reversed. Indeed, the efforts can often result in stocks quickly and tremendously dropping. Therefore, the safest, most profitable approach is buying tech short squeeze candidates that have at least decent fundaments before they have begun to be squeezed.
Here are three tech stocks that meet those criteria.
Upstart (UPST)
Upstart (NASDAQ:UPST) uses artificial intelligence (AI) to predict which borrowers are most likely to default. An astounding 32.3% of its shares were being sold short as of Aug. 15.
One reason why I think UPST is one of the top tech short squeeze candidates is that the company generated much better financial results when interest rates were low. As I’ve pointed out recently, Federal Reserve Chairman Jerome Powell strongly indicated last week that the central bank could lower rates before inflation hits its official target. I believe that an earlier-than-expected rate cut, which appears likely, along with increased respect for the power of artificial intelligence could very well trigger a huge short squeeze in UPST.
On the fundamentals front, UPST did manage to generate EBITDA excluding some items, of about $5 million last quarter, while it reported adjusted EPS of 6 cents.
Super Micro (SMCI)
Super Micro (NASDAQ:SMCI) “develops and manufactures high-performance server and storage solutions” often used to support the “deployment” of artificial intelligence. In fact, SMCI partners with Nvidia (NASDAQ:NVDA), whose chips are used to produce the vast majority of AI at this point.
Nevertheless., a hefty 9% of SMCI stock was being sold short as of Aug. 15.
As with UPST, renewed excitement about the power of AI could quite easily create a tremendous short squeeze in SMCI. In terms of fundamentals, SMCI’s total sales jumped 33% year-over-year last quarter. Its net income climbed to $194 million, compared with $86 million during the same period a year earlier.
The company’s forward price-earnings ratio is a very low 14.5.
Shoals (SHLS)
Shoals (NASDAQ:SHLS) manufactures and sells electrical components used in large-scale solar energy deployments. As of Aug. 15, 10% of the stock’s float was being held short.
Solar energy stocks have been hammered recently because the growth of American residential solar deployments have greatly decelerated due to higher interest rates.
But the reports I’ve seen have stated that large scale solar deployments in the U.S. continue to grow rapidly, while both rooftop and solar energy in Europe, where Shoals also has a significant presence, is still expanding very quickly.
Also noteworthy, I expect interest rates to start dropping earlier than many expect. Such a development is likely to make many investors more upbeat about the solar sector in general and SHLS stock in particular.
Shoals’ revenue soared 62% last quarter versus the same period a year earlier to $119.2 million.
On the date of publication, Larry Ramer held a long position in SMCI and SHLS. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.