A BlackBerry Key2 is displayed at the Mobile World Congress in Barcelona on Feb. 27, 2019.
Josep Lago/AFP/Getty ImagesGameStop has become the poster child for the 2021 stock market and its pockets of volatility and speculation. The stock has gained 1,700% in January, causing pain for investors shorting the stock, a popular trade heading into the year.
The huge moves in GameStop (ticker: GME) stock have been at least partly the result of a short squeeze. A squeeze is a phenomenon that can occur after big gains happen in a stock that, in turn, cause mounting losses for short sellers who are forced to cover their positions. Short selling involves borrowing a stock and immediately selling it; if the stock price drops, investors make money by purchasing shares at the lower price and returning the shares to the lender. Because stocks theoretically have no maximum price, there is unlimited risk with any short position—as GameStop shorts have been discovering.
Short sellers looking to get out of a trade are often forced to pay up for the shares needed to cover their trade, leading to a surge in the stock’s price.
It can be tough to find stocks that may be vulnerable to a squeeze. The conventional wisdom suggests that investors should examine the short interest as a percentage of the stock float. If that number is high, say 30% or more, it would be harder for investors to cover their positions, thus creating a squeeze, the theory goes.
But S3 Partners analyst Ihor Dusaniwsky, who closely tracks short selling, thinks there’s a better way to identify short-squeeze candidates.
In his view, it makes more sense to look for potential short squeeze candidates in names where investors have made big and incorrect short calls. That means looking for rising stocks with the largest short positions measured by dollar value.
Barron’s asked S3 to screen for shares in the information technology sector, which is a good proxy for technology, though it excludes names like Facebook (FB) and Amazon.com (AMZN), which are in the communications services and consumer discretionary sectors, respectively. The resulting list includes stocks that trade on major U.S. exchanges and have a market value of more than $500 million. In all, there were 32 companies in which short sellers had year-to-date losses of more than 10%, meaning the underlying shares are rising. Barron’s narrowed the list to the top 15 candidates.
Short Squeeze Candidates
Source: S3 Partners
“While short sellers are not necessarily going to run for the hills in size in all of these securities, there is a good chance that there will be some that will be squeezed out of their positions due to the large early year losses—no one wants to start the new year off with large red numbers in their portfolio,” Dusaniwsky said.
Dusaniwsky said that tech stocks such as 3D Systems (DDD), BlackBerry (BB), SunPower (SPWR), Daqo New Energy (DQ), and Microstrategy (MSTR) are all strong candidates for a short squeeze.
3D Systems is a manufacturer of three dimensional printers, software, and other digital design tools. Shares in the past year looks a little bit like GameStop’s, surging 303% since the beginning of the year. The company pre-announced a strong quarter on Jan. 7, which has boosted shares.
The onetime mobile phone kingpin BlackBerry is also a candidate for a bigger squeeze that could send shares even higher. The Canadian company’s U.S.-traded stock has gained 279% this year—a fact that not even the company could explain. Responding to a request from one of Canada’s security regulators, the company said it isn’t aware of any material developments at the business that it hasn’t disclosed that would account for the surge. The company did settle a patent dispute with Facebook earlier this year, however.
MicroStrategy makes business intelligence software that helps developers make mobile apps. It has also built a large position in Bitcoin. Shares have had a nice run in January, rising 39% through the month.
Two green energy companies appeared in the screen: Daqo New Energy is a China-headquartered solar cell maker and has been in operation since 2007. Shares have advanced 81% in January. The San Jose, Calif.-based SunPower has too had an impressive January run, gaining 104% this month.
Several semiconductor companies also made S3’s list, including Taiwan Semiconductor Manufacturing (TSM) and Intel (INTC). Taiwan Semi has made gains in recent days after a strong earnings report and its announcement that it was making a big investment in expanding its production. Intel shares have advanced after the company announced that Pat Gelsinger, currently CEO of VMware (VMW), would be taking over for Bob Swan.
Dusaniwsky said semiconductor stocks have been rallying since late December, and that several names in the screen may see a squeeze if shorts have to trim their positions due to mounting losses.
Intel and Taiwan Semi are much larger than many of the other companies on Barron’s list, but Dusaniwsky says that any stock can be subject to a squeeze if either of two conditions are present: The cost to borrow shares rises rapidly or short sellers take big losses after a positive move from a stock.
Write to Max A. Cherney at max.cherney@barrons.com
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15 Tech Stock Show Signs of a Potential Short Squeeze - Barron's
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