Stock Of The Day: Short Squeeze In BigBear.ai?

BigBear.ai Holdings, Inc. BBAI continues to trade higher on Wednesday. The stock has staged a significant and rapid rally over the past week. This action could indicate that a short squeeze may be underway.

A short squeeze can force a price higher. But when short squeezes end, stocks can crash. That is what happened to BigBear in February, when its value dropped by 60%. This is why it is our Stock of the Day.

Short sellers borrow shares from other investors and sell them. They believe the stock will go down. They plan to repurchase the shares at a lower price, return them to the lender, and retain the difference.

About 27% of the available BigBear shares have been loaned out. This is an extremely high amount. A stock typically has only about 1 or 2% of its shares on loan. Any stock that has a large number of shares shorted is in danger of being squeezed.

If a stock that is shorted moves higher, the short sellers incur a loss. Sometimes, if the price continues to rise, they panic and attempt to buy back their shares aggressively. This results in the stock continuing to move even higher.

As you can see on the chart, this is what happened in early February.

The climax of a short squeeze occurs when the people who loaned the shares see have much the price has risen and decide they want to sell their shares. At this point, the short sellers are required to buy the shares back regardless of the price and return them. They have no choice.

This can result in even more rapid and large increases in the price.

When a short squeeze ends, the stock can crash. This is what happened with BigBear in the second part of February. The price dropped by more than 60% in just two weeks.

There is no way of knowing if the same thing will happen, but stocks that are driven higher on a short squeeze can make dramatic moves lower when the squeeze ends. It may happen to BigBear again.

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