The short-squeeze stock trade has taken center stage in 2021. While many investors and traders are learning about it for the first time, it's a classic strategy that's been used profitably for years.
Short selling on its own is not really that sinister. The idea is that an investor thinks a stock price will fall so they sell what they do not have in the hope to buy it back at a lower price. In other words, you sell high and buy low.
To sell a stock short, you have to borrow shares to sell, typically from your broker.
The problem is when you sell something you don't own, you're on the hook for returning it. This works great for the short seller when the price of the stock goes down. But when it goes up, their losses can be unlimited.
This is where the short squeeze trade comes in.
Because the short seller is obligated to return those borrowed shares to their rightful owner, they can't just ride out any market move that goes against them. The higher the stock price moves, the bigger the losses with the chance of even more losses. Either the short seller can't take the pain anymore and cuts their losses as soon as possible, or their broker starts to ask for more collateral on the loan, forcing their hand.
They get squeezed between a lot of pain today and potentially even more pain tomorrow, so they buy back the shares to get out of the trade. This provides extra demand for a stock that is already rising, and the stock price can accelerate even higher.
That's a regular occurrence in the stock market. And it can be a profitable way of making money. After all, most successful trades are a matter of being right while the people on the other side are wrong.
While GameStop Corp. (NYSE: GME) is still in the news for another potential short squeeze, it's far from the only stock people are shorting.
Our experts are digging into the data to find good companies with unusual short interest - the perfect recipe for a short squeeze you can ride higher.
Let's take a look...
The amount of a stock's float, or outstanding number of shares, that has been sold short is readily available on many websites. The higher the percentage of short shares, or short interest, the more likely a squeeze can happen.
You will see that a good deal of stocks have short interest. There is always someone willing to bet that the share price is either a little too high, perhaps after a strong rally, or that the company is ready to fail.
However, high short interest on a stock can point to an opportunity. A percentage of short interest above 10% is usually a good threshold.
Another way to find short squeeze candidates is looking at the "days to cover." This can tell us how many trading days it takes for all the short interest to be absorbed given the stock's average daily trading volume. Anything above 10 days is considered to be high.
In both definitions, the longer it takes for short sellers to cover, or unwind their positions, the more likely they will create a bidding war to buy those shares. Prices can soar.
Money Morning's Andrew Keene has found a promising candidate for what he calls a "super short squeeze." The trick is to buy shares before the frenzy begins because once it starts, you might be too late.
Fortunately, Andrew's target is in the sweet spot...
One of Andrew's target stocks for a short squeeze is UTZ Brands Inc. (NYSE: UTZ), the Pennsylvania-based maker of potato chips, pretzels, and other salty snacks. If you live on the east coast, chances are pretty good you have one of the company's containers in your pantry right now.
The stock had been bumping along in the $10 a share range for months before exploding higher last June on news it was merging with the SPAC Collier Creek Holdings. It's been practically a straight-line rally to its recent price of $25.75.
So far, the combination of pandemic-related snacking and further acquisitions has been successful. In January, Citigroup reiterated its "buy" recommendation as it was pleased with the latest purchases of two more brands, including the Mexican-themed "On the Border."
Indeed, Andrew is looking forward to upcoming earnings to be reported in April, where the company is likely to beat estimates once again. With short interest at 5.7% right now, that could provide the next catalyst for the stock, as the doubting short sellers scramble for cover.
His advice? Be there when it happens.
And if you want even more of Andrew's insider insight, make sure you take a look at this...
Andrew Keene was living with his parents. Two years later, he had $5 million to play with - all because of this one strategy.
The crazy thing is you can do it in less than 90 minutes a week.
To see how easy your life could be, click here.
Follow Money Morning on Facebook and Twitter.
