These 2 Short Squeeze Stocks Are Skyrocketing

Meme stocks are back in business

Author's Avatar
Aug 09, 2022
Summary
  • Traders short a stock when they believe it is overvalued or its fundamentals will deteriorate. 
  • Meme stocks are stocks with high short interest that are targeted by buyers to force a short squeeze, driving up the price.
Article's Main Image

When investing, you can either buy a stock (which is called going long) or sell it (i.e. going short). When you purchase a stock, you are forecasting its fundamentals and share price will increase in the future. However, when you short a stock, you are predicting that the fundamentals will decline and so will the share price. Short sellers make money by borrowing the stock from a broker. If the stock falls, they can repurchase the stock at a cheaper price to return to the broker and keep the difference as profit.

One of the many dangers of short selling is the dreaded "short squeeze,” which occurs when a heavily shorted stock starts to rise in price rapidly. This forces the short sellers to buy some of the stock to cover their positions, which forces the stock even higher, and the process repeats until the stock goes to the moon.

Short squeezes used to be rare, but due to the rise of meme stocks, which are targeted by large groups of buyers for the express purpose of triggering a short squeeze, they are far more common than they used to be.

In this article, we will dive into two heavily shorted meme stocks that I believe could continue going higher as more short sellers are squeezed.

Disclaimer: Investing into stocks which are heavily shorted or are going through a short squeeze can be even riskier than most investing. Do not invest any money which you cannot afford to lose. This is not financial advice.

1. Bed Bath & Beyond

Percentage of float shorted: 46.39%

Bed Bath & Beyond (BBBY, Financial) has seen its share price blast 40% higher in the last 24 hours and 97% higher over the past five days. It has approximately 46.39% of its float shorted and thus looks to be a prime candidate for the short squeeze to continue going strong. As of Monday, Aug. 8, the stock was the most popular name searched on the infamous r/WallStreetBets forum, according to data from Quiver Quantitative.

The stock price previously skyrocketed by 796% in March 2020 and January 2021. At one point it topped $35 per share.

1556920180565721088.png

Bed Bath & Beyond is a U.S. chain of retail stores which focuses on home goods. The company has seen its fundamentals decline over the past decade. In 2013, the company generated a respectable $10.9 billion in revenue, but this has now declined by 28% to $7.8 billion as of the full year 2021. However, more worryingly, its operating profit has fallen from $1.638 billion in 2013 to an operating loss of $386 million in the trailing 12 months.

1556927105802027008.png

The company has tried to salvage its business through the launch of eight of their own brands, which have higher margins and reported a 25% run rate in 2021. In the first quarter of 2022, the company initiated 50 store remodels, launched a retail media network and even a new loyalty program. In addition, Bed Bath & Beyond has increased automation of it’s East Coast facility in Pennsylvania in order to help improve supply chain issues.

RC Ventures, owned by activist investor Ryan Cohen, bought close to a 10% stake in Bed Bath & Beyond in the first quarter of 2022, as he advocated selling Bed Bath & Beyond’s Buy Buy Baby segment in order to create more shareholder value. It should be noted that Cohen has built a substantial following on Reddit, and the news of his investment into the stock back in March sent it up by ~39%.

Bed Bath & Beyond has substantial debt of $3.3 billion, which is higher than a decade ago. In addition, its cash position has dwindled from over $1 billion a decade ago to just $100 million as of the first quarter of 2022

Overally, I think Bed Bath & Beyond is a terrible company with declining fundamentals. However, the recent activist investment and retail trader momentum do seem to have created the perfect conditions for a short squeeze.

2. GameStop

Percentage of float shorted: 19%

The king of the meme stocks, GameStop (GME, Financial), is back at it again. It has jumped by over 15% since Aug. 5, and the share price is up 33% over the past month. According to data from Quiver Quantitative, GameStop has had 319 mentions on the WallStreetBets board over the past 24 hours, up by 219%. In addition, it’s the third most mentioned security on the board, after the aforementioned Bed Bath & Beyond and the S&P 500 ETF (SPY, Financial). The stock has approximately 19% of its float shorted at the time of writing, and thus I believe its short squeeze could continue.

Gamestop was founded in 1984 and owns a chain of brick and mortar gaming stores across the U.S. The company grew steadily up until 2017, when Microsoft (MSFT, Financial) announced the launch of theXbox Game Pass Service, which allowed users to download games directly to the console and thus would reduce the need for customers to go into the store. PlayStation Now is a similar service for Xbox's main competitor, which also degraded the outlook of Gamestop.

Management did see the major issue these services would cause and tried to diversify into non-gaming businesses such as collectibles. The company splashed out $1.5 billion on acquisitions, but ended up losing money on the Spring Mobile deal and was left with $800 million in debt. A botched acquisition in 2018 also sent the shares spiraling downward.

Since 2016, revenue has declined by 35% from $9.4 billion to $6 billion in the full year of 2021. Operating income also plummeted from $660 million in 2016 to an operating loss of $419 million by 2021.

1556935312255598592.png

The company has attempted various branding changes such as trying to turn its stores into a competitive gaming and retrogaming facility, but so far this hasn’t been enough. Michael Burry of Scion Asset Management invested into the company in 2019 and sent a letter to GameStop executives urging them to buy back $238 million in stock. In 2021, the company also announced an NFT platform, but the NFT craze has slowed down, and so far it has been unable to gain ground against OpenSea.

The good news for GameStop is they are in a strong cash position with $1 billion in cash and short term investments versus total debt of $617 million, but that doesn't mean growth is ahead.

Final thoughts

Both GameStop and Bed Bath & Beyond are companies with declining fundamentals due to industry shifts which have made their business models irrelevant. Therefore, it makes sense that hedge funds and other investors have shorted the stocks heavily, as they believe they have further to fall. However, recent momentum from activists and retail traders alike has caused short squeezes in these stocks. If investors hop on board early enough, they could benefit from ongoing short squeeze conditions. On the other hand, they will eventually crash back to earth, likely with little to no warning, so investors must be careful. Timing these trades can be extremely challenging and not for the faint hearted.

Disclosures

I/we have no positions in any stocks mentioned, and have no plans to buy any new positions in the stocks mentioned within the next 72 hours. Click for the complete disclosure