Short Sellers Think These Stocks Will Tank in 2024. Investors Can Bet Otherwise
The number of shorted shares has grown 23% since the end of 2020, but that doesn't mean traders are getting more bearish about the market.
Thanks to an array of initial public offerings and stock splits, the total number of stock shares has ballooned since the end of 2020 -- which means the relative short interest has actually fallen.
For large-cap stocks in the $S&P 500(.SPX)$
Small- and mid-cap stocks, on the other hand, usually have higher short interest ratios. For stocks in the S&P small-cap 600 index, the number of shorted shares has increased from 5.4% of total outstanding shares at the end of 2020 to 6.1% as of late, according to FactSet data.
Barron's looked at stocks with the highest ratio of shorted shares to total float -- or the number of shares available to trade on the open market. A higher ratio indicates more bearish sentiment from short sellers that the stocks will sink in 2024. While most retail investors cannot short stocks, it's wise to use short interest as a guide to avoid certain names.
We identified investment bank B. Riley Financial, electric vehicle company $Fisker(FSR.US)$, pet insurance provider $Trupanion(TRUP.US)$, lending platform $Upstart(UPST.US)$, and plant-based meat producer $Beyond Meat(BYND.US)$, among others. Each of the companies on the list has more than one-third of their floating shares sold short.
Of course, contrarian investors could still take a risky move: Heavily shorted stocks are poised for a short squeeze -- a rally triggered by short sellers covering their positions to avoid further losses. The more short interest a stock has, the higher its price can rise in such events.
After all, short sellers have lost nearly $178 billion on their bets this year, according to S3 Partners' data in December.
Since early 2021, many investors have earned huge fortunes by chasing so-called "meme stocks" -- heavily shorted, beaten-up names like $GameStop(GME)$ and $AMC Entertainment(AMC)$
Since then, stocks with high short interest have become prone to being targeted by the short-squeezing crowd. In a recent example, stock in online used car seller $Carvana Co.(CVNA)$ is up more than 1,000% this year, even though more than one third of the company's floating shares are being shorted
Investors that don't want to rely on the whim of the Reddit crowd could look into stocks with a solid prospect of rallying -- most meme stocks receive rather bearish views from Wall Street analysts. The consensus target price for Carvana, for example, is 32% below its current level, according to FactSet.
But some heavily shorted stocks actually have quite bullish outlooks from Wall Street. This means the possibility of outsize gains: If the analysts are right and the stock price goes up, the rally would be amplified as short sellers repurchase shares to cover their losses.
Among stocks with high short interest, Barron's looked at those with consensus target prices -- the average projection of at least 10 analysts -- more than 10% higher than the current levels. Many are beaten-down stocks that Wall Street believes are oversold.
Shares in electric vehicle company Fisker, for example, have plunged 80% this year, and nearly half of the stock's floating shares are currently sold short. But analysts believe the stock could more than double its current value next year.
Chemical processing and welding firm $Frontier Group(ULCC.US)$, solar panel companies $Sunnova Energy International(NOVA.US)$, and EV charging station operator $ChargePoint(CHPT.US)$ are also on the list.
The diverging views from stock analysts and short sellers could create the opportunity for some investors to make a bold bet, but it's not a game for the faint of heart.
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