If you've been an investor for at least a few years, you probably recall the "meme stock" craze of 2021. What you might not realize is that a large portion of the sharp gains certain stocks experienced during that period were the result of short squeezes.
In case you aren't familiar with short squeezes, here's the quick version. Investors (usually hedge funds and large institutions) may develop a negative opinion about a company and sell its stock short in large quantities in a bid to benefit from the expected share price drop. Then some event happens that shifts investor sentiment to positive, and the shares start to rise instead. At a certain point, short sellers will begin to buy shares in quantity to close out their positions and limit their losses. That buying drives the share price up even further, especially if there's a scarcity of investors willing to sell. As the price ascends, more short sellers rush to buy so that they too can exit their short positions, creating a temporary, but vicious cycle.
If a stock has a high percentage of its available shares sold short (also known as short interest), this can result in a massive spike in the stock's price -- a short squeeze.
Now, a full-blown repeat of the meme stock craze isn't likely to happen anytime soon. But there are some stocks -- like these two -- that look like short squeeze candidates if their businesses perform better than expected.
Renewed interest in COVID-19 vaccines could be a big catalyst for Novavax
Vaccine maker Novavax (NASDAQ:NVAX) looks like a prime candidate for a short squeeze. Its shares are down by about 97% from their 2021 high and 43% of the float (shares available for trading) is currently sold short.
To be sure, there are some good reasons for Novavax's poor stock performance. It lagged behind its peers in the race to develop a COVID-19 vaccine and get it approved during the peak periods of demand for those vaccines, and it doesn't have any other approved vaccines on the market yet. However, with COVID-19 diagnoses starting to surge again from new variants as the summer comes to a close, and positive results from studies of the company's reformulated inoculation, it could experience an unexpected increase in revenue that could move its stock price higher.
If its liquidation keeps going well, Seritage Growth Properties could pop
While Novavax's short interest is one of the highest of any company in the market, I generally consider short interest of more than 10% to be rather high. And one real estate investment trust (REIT) with 21% short interest that could be set up for a short squeeze is Seritage Growth Properties (NYSE:SRG).
Seritage is a unique situation. The COVID-19 pandemic simply crushed its business model, and management felt the best course of action was to sell its properties, pay off its debts, and give whatever is left back to its investors. Property sales have been proceeding at a rapid pace, but it's rather unclear how much money the rest of the portfolio will produce. The company still owns 50 properties with 6.8 million square feet of leasable area, several development projects, and more. It owes $480 million on a term loan, and the current market cap of the REIT is just $432 million. If its remaining properties start to sell faster than expected and for good prices, Seritage could certainly experience a short squeeze.
Don't buy a stock just because you hope for a short squeeze
To be perfectly clear, I'm not suggesting that you buy either stock because of its short squeeze potential. If you decide to buy Novavax, it should be because you believe in the long-term potential of its vaccine business. If you buy Seritage, it should be because you think the value of its remaining properties exceeds the sum of its current debt and its market cap. However, these are two stocks that certainly have the potential for short squeezes, so if you see either of them suddenly rocket higher, that could be a contributing factor.
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Matthew Frankel, CFP® has no position in any of the stocks mentioned. The Motley Fool recommends Seritage Growth Properties. The Motley Fool has a disclosure policy.