When trying to figure out what are the best short-squeeze stocks to buy, a great place to check out first is a list of stocks with the highest short interest based on the percentage of outstanding float sold short.
However, buying all of the most shorted stocks is not a surefire way to identify and profit from a short-squeeze investing strategy. Often, a stock becomes heavily shorted for a good reason. For instance, the company is experiencing significant headwinds, like declining revenue, large operating losses, or unsustainable levels of long-term debt.
Nevertheless, once in a while, the short side of the trade can become overly crowded. In other words, short-sellers can sometimes overestimate the chances of future price declines with a particular stock. Or they can underestimate the potential for positive surprises to completely change investor sentiment, leading to a relief rally, scrambling by short sellers, and ultimately, a short squeeze.
Each of the following short-squeeze stocks to buy fits into this latter category.
Short-Squeeze Stocks to Buy: Designer Brands (DBI)
Designer Brands (NYSE:DBI) is currently one of the most heavily shorted stocks. 30% of DBI’s outstanding float has been sold short. This comes even after shares tumbled earlier this month following the release of the footwear company’s latest fiscal results.
For the preceding quarter, Designer Brands reported GAAP earnings of 8 cents per share. According to InvestorPlace Earnings, this fell short of sell-side forecasts, calling for earnings of 12 cents per share. Although Designer Brands reiterated guidance, the size of this earnings miss may have the short side convinced that additional quarterly earnings disappointments lie ahead, leading to more downside for DBI stock.
Then again, with expectations now set so low, there may be room for positive surprises in the quarters ahead. DBI just hired a new Chief Marketing Officer for its DSW retail unit. This may lead to a change in strategy. In turn, this leads to improved results. DBI trades at a super-low 8.9 times forward earnings, leaving plenty of room for a rally on improved results exacerbated by the heavy short interest. Hence, consider DBI one of the top short-squeeze stocks to buy.
Guess? (GES)
Guess? (NYSE:GES) is another consumer discretionary stock that’s been heavily bet against by short-sellers. Short interest currently stands at around 33%. Given the extent in which the apparel company beat on earnings last quarter, it’s surprising that the stock has attracted such high short interest.
For its first fiscal quarter of 2025, Guess? handily beat sell-side revenue and earnings forecasts. More likely than not, the bears are betting that the recent acquisition of Rag & Bone will fail to serve as a panacea for the company’s growth issues. However, much like with DBI, this is a situation where heavy bearishness had led to both low expectations, and a low valuation. GES stock today trades for only 7.3 times forward earnings, and has a 5.82% forward dividend yield to boot.
If subsequent results indicate success with the Rag & Bone deal, and the company’s core business holds steady, shares could be in for a significant surge in price. In other words, in hindsight, it may prove true that the short-sellers were “guessing” wrong about Guess? all along.
Vital Energy (VTLE)
Vital Energy (NYSE:VTLE) is a name I have previously noted for its squeeze appeal. Why do I believe it’s one of the best short-squeeze stocks to buy? It all has to do with the potential for this energy exploration and production (E&P) company to overcome its huge debt issue.
Vital Energy may have $2.24 billion in outstanding debt, but over the past twelve months, the company has generated around $855.4 million in operating cash flow. Furthermore, thanks to some recent acquisitions and production increase efforts, this cash generation may increase in the coming year.
This, in turn, may provide Vital with the cash necessary to pare down debt and perhaps begin returning capital to shareholders via dividends and buybacks. Considering that around 31.6% of the outstanding float is sold short, small improvements may just well lead to a significant rebound for shares. Trading for around $42.50 per share today, VTLE has traded for prices north of $100 per share in the past.
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.