Best Short Squeeze Stocks

A short squeeze occurs when a combination of new buyers and panicked short sellers causes the price of a stock to rise rapidly. Every day investors bet against the price of several securities, and a significant amount of investors will anticipate a securities downfall. But, when the price jumps unexpectedly, the stock begins to gather momentum as short sellers are squeezed out of their positions to cut their losses. Many investors try to foresee a short squeeze and purchase stocks with a large amount of short interest. This can be a viable option for risk-savvy investors, although it is essential to weigh the risks, as they can be significant. Here is Benzinga's list of the best short-squeeze stocks.

Quick Look at the Best Short Squeeze Stocks:

• Gamestop
• AMC
• Volkswagen
• Overstock
• The Children’s Place

The Best Short Squeeze Stocks

In a short squeeze, short sellers must exit their positions with buy orders, and as the stock begins its ascent, the stock becomes more attractive to traders and bullish investors. As a result, the stock rallies, and investing in short squeeze stocks can be extremely profitable. However, it is crucial to be aware that there are, of course, risks.

1. Gamestop

A major short squeeze impacted Gamestop in the early months of 2021. Due to a surge in competitors over the years, the stock was met by a number of short sellers, and approximately 140% of Gamestop’s shares were shorted.

However, the video game retailer was targeted by Reddit users, triggering significant growth in its share price. The interest from investors to cover their short positions only drove the price of Gamestop further. 

After that, it wasn't just Reddit users buying into the stock, as several big investors and retail traders began to pile on.

The stock traded at around $5 per share in early January. But in just one month, the stock reached a valuation of $325. 

2. AMC

The AMC short squeeze occurred during the same time as Gamestop. In January 2021, AMC's surge in price took Wall Street by surprise. Not many investors were looking to buy its shares. Moreover, the stock was facing significant problems due to the pandemic and was on the cusp of bankruptcy. 

Many hedge funds held short positions in the company and were on the receiving end of the short squeeze.

The coordinated move from Reddit users forced many short sellers, such as hedge fund Citadel, to close their position. As a result, the stock rose 301.2% on January 7th and reached all-time highs of $62.55 on June 2nd.

Shares of AMC have since fallen from these highs, but “AMC Apes” on Reddit continue to bet on a short squeeze of the stock. However, the stock has fallen 60% in 2022, so there have been no signs of a potential short squeeze soon. 

3. Volkswagen

Volkswagen was a part of one of the biggest short squeezes in history. The event made Volkswagen, the world's most valuable company in just two days.

The market had developed a bearish outlook for the automotive manufacturer, and a significant number of short-sellers hit the stock. Then, however, an announcement that Porsche held a considerable proportion of the company and planned to add to its investment spooked the markets. 

Investors began to liquidate their short positions, and the stock jumped from around $203 to more than $970, making it the largest company in the world based on market capitalization. The company was worth $359 billion in just two days.

Although the short squeeze did not last long, the stock began its descent after Porsche announced it would sell 5% of its stake. 

4. Overstock

Overstock’s short squeeze occurred after its digital dividend sparked investors' interest. One of Patric Byrne’s last acts at Overstock made life difficult for short sellers.

The inclusion of its digital dividend forced investors to recall their shares loaned out to short sellers, forcing buys to cover the position. The digital dividend presented a problem for short sellers, and overstock gained around 60% in two weeks.

Overall, the reason behind the squeeze was technical but came down to the obligation of the short seller to pass back the dividends to whoever lent the shares. This caused a flurry of investors to cover their shorts and further aided the growth of Overstock.

Headquartered in Secaucus, New Jersey, The Children's Place, Inc. operates as a children's specialty apparel retailer in North America through two segments: The Children's Place U.S. and The Children's Place International. The reason to short here is financial as PLCE lost its place in the S&P small cap 600 and noted that a recession could drag on and reduce sales. With price targets dropping, now may be a good time to short squeeze PLCE if that idea suits your investment strategy.

What Are Short Squeeze Stocks

There are no specific short-squeeze stocks, and a short squeeze can impact any company. Recently, we have seen short squeezes from AMC and Gamestop, which can occur without any prior warning. 

It usually happens to heavily shorted stocks, as the unexpected rise in price causes short sellers to act fast and cover their positions. Then a snowball effect transpires, and rapid advancements in prices attract more buyers. 

Initially, the stock can be heavily shorted as investors believe it is overvalued for multiple reasons. Investors bet on the downfall, but short selling requires the investor to buy shares of the asset, and if the price rises, it's essential to cover their losses. 

How to Identify Short Squeeze Stocks

In hindsight, it is easy to spot a short squeeze stock, but how can investors identify these stocks before their rapid increase? Well, this requires assessing some of the key characteristics listed below.

High short interest: One factor that can be an early sign of a short squeeze is to look at the number of shorted shares for a company. If the number of shorted shares is greater than 10% or slowly increasing, it may be one to watch.

News headlines: Previous short squeezes have been triggered by news headlines, and a positive outlook can initiate the rise in a stock. Therefore, staying informed on the latest news on the company and its industry is essential.

Indicators: Indicators such as a daily moving average chart help evaluate how a stock has traded over a set period. Looking into a 100-day moving average will help identify peaks in a stock's price and potential upcoming areas where the price may spike.

When to Invest in Short Stocks

Heavily shorted stocks can offer the perfect opportunity to buy, as a turnaround may be on the horizon. It is not always straightforward to spot, but timing is critical to invest in short stocks.

Low volatility: If a shorted stock begins to see lower volatility, this may be the best time to look at investing. The bearish view may slow down, and it is a less risky option than going against the trend.

Fundamental: Of course, investing against the crowd will require some reasoning behind the decision. Therefore, your fundamental viewpoint must be correct to invest in short stocks.

Undervalued: Furthermore, the majority of investors choose to invest in stocks they believe are undervalued. If you believe a stock is not trading at an appropriate level, an opportunity to invest is available.

Compare Brokers for Short Squeeze Stocks

To take advantage of a potential short squeeze, you must have an account with a brokerage. 

However, with various brokers online all promising potential riches, it’s hard to distinguish which one may be best for you. Researching the best brokers can take a considerable amount of time, but don’t worry, here we will focus on the best stocks to help you execute positions and benefit from potential short squeezes. 

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