Retail investor interest in short squeeze stocks has grown considerably since the “meme stock” phenomenon of 2021. However, a stock doesn’t need to gain the “meme king” popularity of a GameStop (NYSE:GME) or an AMC Entertainment (NYSE:AMC) to become a profitable squeeze trade for investors.
In many situations, all it takes is two things. First, a high level of short interest. What constitutes high short interest? Think 20%, 30%, 40%, or more of outstanding float sold short.
Second, to trigger a squeeze, typically what’s required is the announcement of unforeseen positive news about the heavily-shorted stock in question. Why? As a sweeping development changes the story behind a stock, the crowded short-side scrambles to cover positions, causing the “squeeze” to occur.
Below are seven stocks that currently have a high level of short interest, and that based on various factors, could become short squeeze stocks in the near-future.
Arbor Realty Trust (ABR)
Arbor Realty Trust (NYSE:ABR) is a real estate investment trust (REIT) specializing in the ownership of commercial and residential mortgages. REITs like Arbor are often referred to as mortgage REITs (mREITs). With the surge in interest rates putting the squeeze on mREIT net interest margins, Wall Street’s “smart money” has been betting against many major names in the space.
ABR stock is no exception. Far from it, in fact. Short interest currently totals 41% of outstanding float. A big reason why Arbor Realty Trust in particular has been a short-seller target may have to do with the myriad of allegations laid against the mREIT, by vocal short seller Viceroy Research. However, Arbor’s management has refuted these allegations. Not only that, Arbor has clearly been successful in navigating sector challenges.
As Seeking Alpha commentator Larry Hall noted last month, the mREIT’s management has been successful at mitigating risk, maintaining Arbor’s profitability, and more importantly, its dividend. While not certain, a continuation of this resilience could prove Viceroy and the rest of the shorts wrong, perhaps turning ABR into one of the short squeeze stocks. In the meantime, contrarians can sit back and collect ABR’s 12.13% dividend.
Kohl’s (KSS)
In prior coverage of Kohl’s (NYSE:KSS), I’ve taken a bearish stance on the department store chain’s shares. Largely, due to the risk of a posssible dividend cut down the road. At current prices, KSS sports a forward dividend yield of 8.9%.
However, as inflation and soft demand decimate bricks and mortar retail profitability, it may prove challenging to sustain this high level of payout. I’m clearly not the only one leaning bearish about the future prospect of KSS stock. Shares are among the most heavily-shorted, with short interest totaling 33.58% of outstanding float. Having said all of this, with shares back down near pandemic-era levels, the worst may just well now be fully priced into KSS, and then some.
The latest plunge for Kohl’s shares happened late last month, following the company’s latest earnings release. The retailer reported an unexpected loss, and provided weak guidance for the full year. However, if next quarter or a few quarters from now, Kohl’s reports “better than feared” numbers, or if an improving macro backdrop leads to an upward revision to forecasts? It’s easy to see KSS getting squeezed back to higher prices.
Medical Properties Trust (MPW)
Medical Properties Trust (NYSE:MPW) is a stock that in hindsight I was overly bearish about. While the healthcare-focused REIT had its share of big issues and risks, looking back it’s clear that said issues were more than accounted for, with MPW is stuck in “penny stock territory,” or at prices below $5 per share.
Although playing out gradually, one can say that the MPW stock has been one of the short squeeze stocks this year. Promising news regarding a problem tenant, along with other positive developments has helped to boost bullishness and increase confidence that Medical Properties Trust can maintain its current dividend. At today’s prices, MPW’s quarterly dividend gives the stock a forward yield of 10.66%.
But even after benefiting from a slow-and-steady squeeze, additional spikes could be in the cards for MPW. Short interest remains very high, at 35.07% of outstanding float. Tenant issues could continue to enter the rearview mirror. The REIT could also make further progress assuaging concerns about debt, through efforts like its recent $800 million refinancing. In the next earnings release, stronger-than-expected results and upbeat guidance may result in yet another squeeze for shares.
Phathom Pharmaceuticals (PHAT)
Biotech firm Phathom Pharmaceuticals (NASDAQ:PHAT) develops and commercializes treatment for gastrointestinal (GI) diseases. The key candidate in Phathom’s pipeline is Voquenza. As InvestorPlace’s Larry Ramer noted last month, the company has already obtained Food and Drug Administration (FDA) approval for Voquenza’s use as a treatment for erosive gastroesophageal reflux disease (GERD).
However, as Ramer also noted, obtaining approval for Voquenza as a treatment for non-erosive GERD will be the real needle-moving catalyst for PHAT stock, if it happens. The short-side clearly does not think it will happen. That’s why short interest for PHAT currently stands at 28.21% of outstanding float. Yet while this skepticism may suggest high uncertainty over FDA approval, the risk could be far outweighed by the upside if Voquenza gets the non-erosive GERD green light.
PHAT has cratered in price since 2021, when it traded for prices north of $45 per share. With millions of Americans being treated for acid-related stomach issues, label expansion for Voquenza, selling for $650 per 30-dose bottle, could make it a blockbuster drug. This, coupled with the short squeezing that’s likely to occur upon gaining non-erosive GERD regulatory approval, could send PHAT back toward prior price levels.
Children’s Place (PLCE)
Children’s Place (NASDAQ:PLCE) is a stock that I have previously noted as having high squeeze potential. Last August, I argued that stronger results could send PLCE, then trading at around $27 per share, back up to triple-digit price levels. Unfortunately, better results have thus far failed to arrive.
Instead of rising fourfold, PLCE stock has instead fallen by around 57.4%. Yet while I clearly made the wrong call, it may have just been a case of taking a bullish stance way too early. It’s important to note that, while down considerably from last year, PLCE stock has bounced back strongly from its 52-week low of $6.58 per share. Mostly, due to Mithaq Capital, PLCE’s majority shareholder, providing the company with more liquidity to fund its e-commerce transformation.
The short side may stay crowded for now, with nearly a quarter of PLCE’s outstanding float sold short. However, much like the aforementioned Mithaq news caused an extended squeeze during April and May, similarly-positive developments may results in similarly outsized moves higher for hard-hit PLCE shares.
B Riley (RILY)
B. Riley (NASDAQ:RILY) is another name better described as one of the short squeeze stocks, rather than a short squeeze stock in the making. Back in late April, shares in this heavily-shorted investment bank and holding company went to the moon, thanks to a legal-related announcement.
The reason why so many investors were betting against RILY stock, had to do with B. Riley’s association with a financier currently facing allegations of securities fraud. To address and remedy this issue, B. Riley initiated an independent investigation. On April 24, this investigation concluded that there was no involvement or knowledge on B. Riley’s part, in the financier’s alleged activities. As a result, shares surged, as the long side squeezed the short side out of positions.
Short interest with RILY has come down since then, but remains at very elevated levels. Currently, short interest totals 51.8% of outstanding float. B. Riley has also given back much of its short squeeze gains, yet I wouldn’t rule out a possible further squeezing down the road. Back in April, InvestorPlace’s Steve Booyens noted many potential growth opportunities for B. Riley’s investment banking unit. Fiscal results for the company could improve, sparking additional squeezes higher.
Vital Energy (VTLE)
Vital Energy (NYSE:VTLE) is an independent energy exploration and production (E&P) company. Vital’s focus is mainly on oil and gas projects located in the Permian Basin region of the southwestern United States.
The Permian of course contains one of the richest deposits of fossil fuels in the U.S., and Vital is generating significant cash flow from its operations. Even so, this hasn’t stopped VTLE stock from having a crowded short side. Short interest currently totals 31.97% of outstanding float. One reason as to why the shorts are betting against Vital may have to do with the E&P’s highly-leveraged balance sheet. The company has around $2.24 billion in outstanding long-term debt.
However, with Vital increasing production, organically and through acquisitions, it’s not just wishful thinking that’s driving sell-side forecasts calling for major earnings growth next year. If it becomes more clear that results will live up to these forecasts, which call for 31.6% earnings growth next year, VTLE could soon become one of the short squeeze stocks.
On the date of publication, Thomas Niel did not hold (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.
