Betting on the Squeeze: 3 Stocks to Capitalize on Short Seller Pain

Stocks to buy

Today, massive short-squeeze opportunities aren’t as common as they once were. The advent of rapid, high-frequency trading and automated management systems lets short sellers closely track a stock’s movement and jump into action before the conditions for a short squeeze fully materialize. Still, certain heavily shorted stocks present the potential for quick gains as short sellers exit their positions. But high short interest isn’t the best indicator on its own — you have to look at the company’s underlying potential and prospects, unlike, say, hoping for another once-in-a-lifetime short squeeze on a poor performer like Gamestop (NYSE:GME)

These three stocks have both traits: decent prospects on their own but unusually high short interest considering their true potential. And that formula sets the perfect conditions for a short squeeze.

Imperial Petroleum (IMPP)

With a 65% short interest, Imperial Petroleum (NASDAQ:IMPP) is the fourth-most shorted stock this week, notable since many analysts find no substantial flaws with the stock.

Imperial operates a relatively small fleet of tankers transporting refined oil. Like many stocks in the sector, Imperial presents a decent small-cap value opportunity beyond its strong short-squeeze potential.

Imperial Petroleum’s earnings report on Feb. 13th, detailing the last quarter and the full fiscal year 2023, demonstrates its strength on both counts. Although Q4 showed modest performance, the year’s financials demonstrated a revenue surge of nearly 90% and net income growth of 141% from 2022. Furthermore, leveraging its substantial cash reserves, the company has continued its $10 million share buyback program throughout the quarter.

This strategy is particularly significant given Imperial’s status as one of the most shorted stocks and its slow melt upward over the past month. By buying back shares at these lower prices, IMPP’s management effectively capitalizes on the discount. Coupled with the high short interest, this move significantly heightens the potential for a dramatic short squeeze.

iRobot (IRBT)

Bears are still betting iRobot‘s (NASDAQ:IRBT) failed Amazon (NASDAQ:AMZN) acquisition spells doom for the robotic vacuum maker. Previously a top merger arbitrage play for 2024, iRobot pivoted to its new status as a prime candidate for a short squeeze with a 35% short interest. Beyond its short-squeeze potential, iRobot stands out as a solid value investment, considering its 0.25x price-to-sales ratio. The company’s sales remain solid to boot, especially considering its higher-end product line and current household budget tightening.

The company’s fourth-quarter and end-of-year filings also point to successful executive adaptation to changing conditions. The year’s final quarter highlights include a narrower net loss per share ($2.28) compared to a $3.07 loss during the same period in 2022. That comes, in part, from the rapid right-sizing post-merger collapse that includes an “operational restructuring plan [to] stabilize the business” with plans to “simplify [their] cost structure, create a more sustainable business model, and [focus on] core value drivers.”

Ultimately, iRobot is more than a vacuum maker. The company’s range of automation and robotics patents are a major reason Amazon angled for the buyout in the first place. Even if the company can’t set new financial records, it can always fall back on that figurative goldmine.

Desktop Metal (DM)

Desktop Metal (NYSE:DM), a penny stock in the 3D-printing sector, faces substantial short interest (currently sitting around 33%). But the company has a handful of bullish tailwinds gathering behind it that could rapidly trigger an uncontrollable short squeeze, considering its low per-share pricing.

First, with shares sitting consistently below $1, there’s little gain to be had from continuing to hold a short position. The risk/reward balance skews heavily toward the risk side of the equation. Expect any significant upward movement to trigger rapid closure. Secondly, Desktop Metal is right-sizing operations, and its recent quarterly report underscores the point. The company’s most recent filing includes a record $65 million in annual recurring revenue — a 29% increase year-over-year. It also enjoyed a substantial reduction in net losses to $323.3 million from a previous $740.3 million.

The company’s potential is further underscored by the strategic backing of heavyweights like Google (NASDAQ:GOOG)(NASDAQ:GOOGL) and Ford (NYSE:F). It indicates a solid vote of confidence in Desktop Metal’s operational and strategic direction. Beyond that backing, Desktop Metal’s healthcare subsidiary (Desktop Health) just launched ScanUp. It’s a subscription-based initiative to bring dental practices into the 21st century by introducing them to digital workflows. Since “half of the dentists in the U.S. have not yet adopted intraoral scanning,” Desktop Health is penetrating a vast and largely untapped market. The platform, bundled into an initial 36-month commitment, promises to secure steady, predictable revenue streams for Desktop Metal, increasing the odds of a short squeeze.

On the date of publication, Jeremy Flint held no positions in the securities mentioned. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Jeremy Flint, an MBA graduate and skilled finance writer, excels in content strategy for wealth managers and investment funds. Passionate about simplifying complex market concepts, he focuses on fixed-income investing, alternative investments, economic analysis, and the oil, gas, and utilities sectors. Jeremy’s work can also be found at www.jeremyflint.work.

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