Lordstown Motors is on a list of squeezable stocks.
Courtesy Lordstown Motors
Investors who have bet against the electric-vehicle industry should take note. Five of 25 U.S. companies that the short-selling research firm S3 Partners identified as being at risk of a squeeze are in the EV business.
Being squeezed is a fear of any trader brave enough to short stocks, selling borrowed shares in hopes that the price will fall. If that happens, the short seller can buy the stock back at the lower price and return the borrowed shares. The short seller pockets the difference between where they sold the stock and the price when they bought it back.
The problem is that shorting can be a tough way to make money. Stocks tend to go up over time. And shorting carries its own risks, including the risk of a squeeze.
If too many investors have the same idea, and short the same stock, then any good news affecting that stock can send it soaring as bears rush to close out their positions. That’s a squeeze.
Take the EV startup Canoo (ticker: GOEV). A lot of bearish investors have sold short its shares, which jumped about 65% this past week. The stock was even up more than 100% for some time on July 12, after Canoo announced a deal to sell electric delivery vans to Walmart (WMT). A couple of days later, Canoo announced the U.S. military had agreed to try out some of its EVs. Shares closed up 29% the day of that announcement.
The news was good, but that trading action felt like a short squeeze.
“The recent rally off the June 16 lows …has made some crowded shorts more squeezable,” wrote S3 managing director Ihor Dusaniwsky in a report published Monday. The S&P is up about 7% since June 16. “The Consumer Discretionary (primarily auto) and HealthCare (Biotech) sectors have the most constituents in the top 25 most squeezable stocks.”
The other automotive firms on his list of squeezable stocks are EV start-ups: Lordstown Motor (RIDE), Faraday Future Intelligent Electric (FFIE), Fisker (FSR), and Lucid (LCID).
The other 20 stocks are: Gossamer Bio (GOSS), Verve Therapeutics (VERV), Lightwave Logic (LWLG), Beam Therapeutics (BEAM), Cowen (COWN), Veru (VERU), Beyond Meat (BYND), Fate Therapeutics (FATE), Allogene Therapeutics (ALLO), Springworks Therapeutics (SWTX), Microvision (MVIS), Marathon Digital (MARA), AMC Entertainment (AMC), Erasca (ERAS), Rocket Companies (RKT), Dick’s Sporting Goods (DKS), MicroStrategy (MSTR), Teladoc Health (TDOC), Dutch Bros (BROS) and GameStop (GME).
The easiest way to see if a stock might get squeezed is to check the short-interest ratio. That is, essentially, the amount of stock borrowed and sold short compared with all the shares available for trading.
The average short interest ratio for stocks in the S&P 500 is less than 2%, but the S&P is a set of large stocks. The average short-interest ratio for stocks in the Russell 2000 index of small capitalization companies is about 7%. The average short-interest ratio in the 25 stocks identified by S3 Partners is about 27%, roughly four times as much as the average small-cap stock.
In assessing the risk of a squeeze, S3 looks at more than just the short-interest ratio. It also considers the cost to borrow shares and daily trading volumes, among other factors.
Regardless of the math, bearish investors may want to think about S3’s list. What happened to Canoo shares highlights the danger of being on the wrong side of a squeeze.
Write to Al Root at allen.root@dowjones.com
Source: finance.yahoo.com