Short-squeeze stocks have been one of the most intriguing phenomena on Wall Street in recent years. Driven by online communities of retail investors, these stocks can soar to incredible heights in a matter of days, squeezing out the short sellers who bet against them. It often takes just a small catalyst for many of these stocks soaked in red ink to make a sharp U-turn.
Naturally, almost all these short-squeeze stocks have fundamental flaws that justify their bearish sentiment. But unexpected events, such as an acquisition or new funding, can (and do) happen. Going contrarian before these events can pay off heavily, but it is risky. However, if you play your cards right, the potential rewards here are very compelling.
Thus if your appetite can handle the risk, I believe the following three short-squeeze stocks could beat the bears:
Carvana (NYSE:CVNA), an online used car retailer, is one of the most significantly shorted stocks in the market right now. The short interest here is 66.8%, although CVNA has doubled since last year. That’s because the company faces the risk of bankruptcy due to high amounts of cash burn and debt on its balance sheet.
For example, its cash-to-debt ratio is at 0.5, worse than 92% of its peers. Its debt-to-equity and debt-to-earnings before interest, taxes, depreciation and amortization are also the worst in the vehicle parts sector. With that in mind, it’s easy to understand why the Street is so bearish on the stock.
However, contrarians argue that it’s not all doom and gloom for the business just yet. The company can still sell off its assets and restructure its debt to stay afloat until the macroeconomic environment allows it to recover long-term. That is certainly possible if both the economy and the used auto market start to play in its favor, but the high amount of debt will keep the company strangled for years to come.
Regardless, the short interest in this stock will likely trigger a rally when good news does come. I do not see the business going bankrupt soon as it has $3.9 billion in liquidity, enough to go through 2023.
AMC Entertainment (AMC)
AMC Entertainment (NYSE:AMC) has been a meme stock in the spotlight for the last two years. It had an eye-watering 2,695%-plus rally that lasted until the first half of 2021, primarily driven by retail investors from Reddit. So far in 2023, it has gained 35.9% year-to-date, and excitement still hasn’t dried up.
The recent rally is due to the company holding off on its decision to do a reverse stock split and the conversion of AMC Preferred Equity (NYSE:) units to common shares after a lawsuit. While that does hurt the business’ underlying ability to raise cash this way, meme stock investors rarely invest because of a company’s financials. Thus, even if the AMC business has lots of headwinds, it has too much short interest to not be among the biggest short-squeeze stock candidates. 2023 is also a year where many more anticipated movie titles are going to be released.
Nonetheless, the risk here is extreme as big movies can be made either way. Borrowing costs are exceptionally high for the stock, while the lawsuit adds another level of uncertainty.
Marathon Digital (MARA)
Marathon Digital (NASDAQ:MARA) has been building up momentum for a breakout as the crypto rally refuses to cool down. The company had substantial selling pressure that is now fading away against the backdrop of a 200%-plus YTD gain. The remaining bears are also likely to give up if trends continue.
The company continues to grow its Bitcoin (BTC-USD) mining operations with a record production of 687 BTC, up 45% month-over-month, and on track to double its hash rate in the next few months. I believe this can make MARA among the best-performing short-squeeze stocks if it succeeds in doubling its hash rate ahead of the Bitcoin halving. It also holds over 8,090 BTC that can significantly appreciate in value after the halving event. The short interest here is 26.82%.
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On the date of publication, Omor Ibne Ehsan did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.