One of the biggest developments in the market in recent years has been the rise in meme stocks. Individual traders have taken to forums such as Reddit to organize discussions and advocacy around certain companies. Much of this has been related to short squeeze stocks.
The WallStreetBets group had great initial success with GameStop shares skyrocketing in early 2021. However, not all potential short squeeze opportunities turn out so well. More recent high-profile short squeeze stocks such as AMC Entertainment, Bed Bath & Beyond, and Meta Materials have led to far less lucrative outcomes for shareholders.
All this to say is that it’s crucial to use discretion when evaluating stocks for potential short squeeze profits.
These three top short squeeze stocks to buy have solid underlying businesses and could reward investors both due to a potential squeeze and an improvement in the firm’s underlying fundamentals.
Chewy (NYSE:CHWY) is a leading online e-commerce website for pet food, toys, and wellness products.
Ryan Cohen founded Chewy. Cohen, you may recall, played an integral role in the GameStop short squeeze. His former company, Chewy, has also attracted a lot of short sellers.
The bear case is easy to understand; pet products were a pandemic-era boom that has now ended. With people returning to school and work, people are far less focused on adopting and spending money on their pets. It’s a fair argument.
Chewy put many of these concerns to rest, however, with its Q1 earnings report. In it, Chewy earned 20 cents per share which was far ahead of expectations for 8 cents per share. Revenues topped expectations.
Adding to the good news, the company’s profit margins notably expanded as inflationary pressures have receded.
CHWY stock jumped 20% on the news. Shares are merely flat year-to-date. If Chewy can keep up the positive operating results, shares could have substantially more upside as nearly 20% of Chewy’s float is sold short at present.
Paramount Global (PARA)
There’s a good reason Paramount Global (NASDAQ:PARA) could be a major short squeeze opportunity; it’s already done it once. Back in 2021, PARA stock blasted off from $30 to $100 within a few months in a jaw-dropping parabolic run. Note that the firm was known as ViacomCBS at this time.
As it would turn out, an under-the-radar hedge fund, Archegos Capital Management, had accumulated a massive position in Paramount stock and kept buying on the way up, leading to a major short squeeze.
Eventually, however, Archegos’ fortunes turned, and it was forced to dump its positions. PARA stock quickly collapsed back to $30.
It wouldn’t stop there, however. The slump in the streaming industry has punished PARA stock, with shares now falling to less than half of where they were trading before the 2021 run kicked off. Paramount also recently slashed its dividend, leading to a round of capitulation selling from jilted income investors.
But the worst could be past. Several leading streaming firms have posted stronger subscriber numbers in 2023. With PARA stock already having delivered plenty of bad news including the dividend cut, it’s hard for expectations to get much lower.
Paramount remains profitable and 18% of PARA stock’s float has been sold short, potentially setting the stage for a massive comeback.
UWM Holdings (UWMC)
UWM Holdings (NYSE:UWMC) is one of America’s largest mortgage lending companies.
The specialty firm rose to prominence during the pandemic. With people upgrading their housing situations at record numbers, UWM saw an absolute boom in business. Its revenues soared from $502 million in 2018 to $5.0 billion in 2020.
However, that momentum faded. Revenues slumped to $2.1 billion in 2022 and are projected to further slide to $1.7 billion this year. It’s not just the cooling housing market; soaring interest rates have also crushed demand for refinancing transactions.
Despite the drastic downturn in demand, however, UWM is holding in there with revenues at more than triple 2018 levels.
Jeffries recently upgraded UWMC stock, noting that the company is enjoying market share gains as other lenders exit the market. This is what happens during busts. The weak drop out and the strong consolidate their position and enjoy gains.
UWM will have soft earnings in 2023 and quite possibly in 2024. But analysts expect it to remain profitable during the downturn, and it should be set for massive profitability once the housing market turns up again.
Meanwhile, with 25% of the float sold short, any positive catalysts could launch UWMC stock higher.
On the date of publication, Ian Bezek did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.