There was a time when investors used to avoid heavily shorted stocks. Building-up of short interest indicates a bearish view of the stock, translating into a sustained correction. However, things changed in 2021 when retail investors targeted heavily shorted stocks in anticipation of a big short-squeeze rally. At least for some time, the results were amazing. There were stocks with high short interest that skyrocketed and delivered multi-bagger returns in weeks.
However, once that phase of the trading frenzy was over, things returned to normal. Of course, there are selective stories with high short interest that skyrocket from oversold levels, but it’s far from being a broad-based frenzy.
Therefore, I would be cautious about taking stock positions just because they are heavily shorted. Looking for heavily shorted stocks with positive impending business catalysts makes more sense. Purely speculative ideas might disappoint.
This column focuses on three heavily shorted stocks that are unlikely to witness a squeeze.
Lucid Group (LCID)
Lucid Group (NASDAQ:LCID) has been an epic disappointment among electric vehicle companies. From being touted as a Tesla (NASDAQ:TSLA) competitor, LCID stock is now trading at penny levels. I continue to remain bearish from a fundamental perspective. Even with a deep correction and a short interest of almost 28%, I don’t expect any meaningful reversal rally.
It’s worth noting that Lucid has disappointed on several fronts. The Company’s production and deliveries growth has remained subdued. Given this scenario, I don’t see a positive adjusted EBITDA until 2026. The Company will, therefore, pursue further dilution for survival, and that’s not good news for the stock.
It’s worth noting that in November, the Company unveiled Lucid Gravity. Production for the model is expected to commence towards the end of 2024. However, the product unveiling did not excite the market. The focus will likely remain on the backlog growth and its impact on revenue and cash flows. There is a lack of good news on that front, and LCID stock will likely remain depressed.
Novavax (NVAX)
Novavax (NASDAQ:NVAX) stock had skyrocketed to $290 in the first quarter of 2021. This was at a time when the Company’s COVID-19 vaccine was approved. However, Novavax was always a laggard in the vaccine race.
Even with approvals, the Company didn’t have an addressable market. With a weak pipeline, NVAX stock was punished by investors and currently trades below $5. It’s worth noting that even after a massive plunge, the short interest in the stock is at 40%.
The reason is that Novavax has no revenue or cash flow visibility. Further, as the Company tries to build a pipeline of vaccines, it involves an extended period of clinical trials and cash burn. I, therefore, remain bearish on NVAX stock.
I must add that Novavax is targeting cost cutting of $300 million next year. With a focus on cost-cutting, it’s unlikely that the Company will build further on the current pipeline. This is potentially negative for long-term growth.
ChargePoint Holdings (CHPT)
ChargePoint Holdings (NYSE:CHPT) seems like another heavily shorted stock unlikely to bounce back. Even after a correction of 75% in the last 12 months, CHPT stock has a short interest of 25%.
There is no doubt that the EV charging infrastructure industry has long-term tailwinds. However, competition has intensified, and not all players will survive. Further, cash burn has been sustained for emerging companies, and that’s a concern from the perspective of financing growth. ChargePoint seems to be among the players struggling for a turnaround.
It’s also worth noting that for Q3 2023, ChargePoint reported a revenue decline of 12% on a year-on-year basis to $110 million. For an industry that’s at an early growth stage, a decline in revenue is a red flag. Further, for the first nine months of 2023, ChargePoint reported operating level loss of $357 million. It’s likely that further dilution of equity will be needed in the next 12 months for survival. Amidst these concerns, I don’t see CHPT stock trending higher.
On the date of publication, Faisal Humayun 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.
