Popular speculative enterprise FuelCell Energy (NASDAQ:FCEL) — which specializes in fuel cell and electrolysis platforms for the decarbonization of power and the production of hydrogen — saw its shares pop on no company-specific news. Instead, the return of the meme-trading phenomenon has likely catapulted FCEL stock.
On Sunday, Keith Gill — better known by his online moniker “Roaring Kitty” — posted a series of social media messages implying strongly that he was ready to take the helm of the meme-stock movement he originally sparked years ago. That sent several previously targeted securities rocketing higher when the market opened on Monday.
However, what has intrigued investors is that the meme sentiment continues to burn hot. Subsequently, FCEL stock represented one of the downwind beneficiaries. Likely contributing to the upswing is FuelCell’s high short interest of 21.96% of its float.
According to Investopedia, “[s]hort interest as a percentage of float above 10% is fairly high, indicating significant pessimistic sentiment. Short interest as a percentage of float above 20% is extremely high.” Ordinarily, that would be bad news for stakeholders. Nevertheless, this metric also sets up the possibility of a contrarian trade based on the short squeeze.
FCEL Stock Could Be the Next Meme
With the original meme stocks hogging up the spotlight, it’s possible that value-oriented traders may look toward alternative opportunities. Given that FCEL stock “only” gained around 20% over the past five sessions, it may be ripe for upside speculation.
Because of the high short interest, short traders could panic out of their positions, resulting in an upside for FuelCell. To initiate a short position, traders must first borrow the target security from a broker. Subsequently, they sell the shares, hoping to pick them back up at a discount. After returning the borrowed securities to the broker, the short trader pockets the rest (minus fees) as profit.
Of course, this framework only works well if the target security falls in value. If it rises — as is the case with FCEL stock — the short trader must return the borrowed shares at a higher price than the original transaction cost. If the price rises too much, the short trader risks getting a margin call. At that point, the trader must either secure the position or have it forcibly closed.
Fulfilling a short contract involves buying to close. Naturally, this action will create upward pressure on the security, making short squeezes very compelling.
Why It Matters
Of course, the risk to bidding up short-squeeze targets is that the underlying enterprise is typically flawed. At some point, then, the fundamentals may take over. For FCEL stock specifically, analysts rate shares a consensus hold. Tellingly, no expert within the past three months rated shares a buy.
On the date of publication, Josh Enomoto 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.
