Short squeezes, which are characterized by sudden and substantial surges in asset prices, have become prominent and debated phenomena on Wall Street in recent years. A short squeeze occurs when a high number of traders who shorted a given instrument are compelled to close their positions, ultimately pushing the asset’s price higher.
One should look closer at the short interest data to identify potential stocks that could stage a short squeeze rally. More precisely, the short interest ratio is a metric that reveals the proportion of shares held short in a stock relative to its average daily trading volume.
This ratio provides a quick indication of whether a stock is heavily shorted or not, offering insights into market sentiment. Usually, a short interest as a percentage of float above 20% is regarded as high.
Hence, a short squeeze occurs when a stock experiences a sudden and substantial increase in its price, catching short sellers off guard. As the price rises, short sellers who initially bet on the security’s decline face increasing losses. In response, some short sellers may choose to cut their losses and exit their positions. This rush to cover short positions amplifies the price increase.
Let’s take a look at three short-squeeze stocks that might experience this phenomenon before the year’s end.
Short-Squeeze Stocks: Novavax (NVAX)
Novavax (NASDAQ:NVAX) is a biotechnology company focused on developing drugs to address global health challenges. Notably, their Covid-19 vaccine — NVX-CoV2373 — has gained attention for its efficacy against the virus.
According to the data from Nov. 15, Novavax stock has a short interest of 37.3%, which is extremely high. Based on Wednesday’s closing price, Novavax has a market capitalization of $660 million. Shares are down 46% year-to-date (YTD).
The stock moved a bit higher this week after NVX-CoV2601, a new type of the Covid-19 vaccine, received an Emergency Use Listing (EUL) from the World Health Organization (WHO) for individuals aged 12 and above. The decision was supported by non-clinical data demonstrating the vaccine’s efficacy against XBB.1.5, XBB.1.16, and XBB.2.3 variants, contributing to efforts in combating Covid-19.
C3.ai (AI)
C3.ai (NYSE:AI) is a leading enterprise artificial intelligence (AI) software provider that is developing products and solutions to enhance business decision-making and operational efficiency. The company focuses on integrating advanced analytics, machine learning, and IoT data to enable clients to optimize processes.
As expected, C3.ai has been a major beneficiary of the generative AI (GenAI) transformation, with shares up 170% since the start of the year. Still, the stock has a 34.7% short interest as short-sellers argue that C3.ai is yet to see a meaningful material boost from AI.
Their thesis received a major boost in September when the company delayed its profitability target, casting a major doubt on AI hype. More concretely, the company said it expects to be cash-positive in Q4 FY 24. In FY 25, the non-GAAP profitability will only arrive in FY25 due to expensive investments in GenAI solutions.
While C3.ai faces challenges as its expanding applications suite puts it in direct competition with more rivals, the company is also making steady progress on the AI front. If this progress can translate into a material financial improvement, the stock is very likely to re-rate significantly higher amid a very high short interest.
Short-Squeeze Stocks: SunPower (SPWR)
SunPower (NASDAQ:SPWR) offers comprehensive residential solar solutions complemented by personalized customer service and an industry-leading warranty. The company has nearly four decades of experience in the solar sector. It is the only U.S.-based solar company with a track record longer than its 25-year warranty.
Still, its shares are down 76.3% YTD in light of the challenging period for solar companies. The industry is grappling with inflation and rate hikes that have dampened demand, particularly for residential solar services. As a result, short-sellers have been boosting their bets that the stock will continue to fall, resulting in a 34.8% short interest.
Most recently, the solar services provider announced a restatement of some previous financial statements, triggering a sharp decline in its stock. The correction of financial statements for 2022 and the first two quarters of 2023 adds to a series of volatility episodes in the solar sector. Another major solar services provider, SolarEdge (NASDAQ:SEDG), saw its stock fall significantly in late October when it cut its outlook, citing soft demand in Europe.
Given the improving environment for risk assets, after the Federal Reserve said it is likely done with raising rates, the solar sector could stage a more meaningful bounce given these oversold levels. The next earnings report could act as a catalyst in this context.
On the date of publication, Shane Neagle 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.