In general, heavily shorted stocks have negative business sentiment due to industry or company-specific factors. Investors bet on the stocks trending lower. However, markets are unpredictable and one good news can trigger a sharp reversal rally.
For heavily shorted stocks, any big movement on the upside results in a further surge due to a short squeeze. In the market rally after March 20221, Reddit investors targeted heavily shorted stocks and there were some historic short squeeze rallies.
With the broader market sentiment improving to some extent, I believe it’s a good time to consider exposure to heavily shorted stocks. Of course, I would not risk big money on this strategy. However, if the bets are placed to deliver results, returns can be robust.
My focus is on heavily shorted stocks that have good fundamentals or growth outlooks. The worst-case scenario here is that there will be no short squeeze rally. I would be comfortable holding these stocks for the medium to long-term.
Let’s look at the potential catalysts that can trigger a short squeeze rally in these heavily shorted stocks.
Riot Blockchain (RIOT)
It’s no secret that Bitcoin (BTC-USD) is high on volatility. The same holds true for crypto stocks. Investors can therefore make quick money on crypto stock reversals. Riot Blockchain (NASDAQ:RIOT) looks interesting with a short interest that’s 23.7% of the free float.
If Bitcoin trends higher and with aggressive addition to the hashing capacity, Riot stock can potentially explode from current levels. Recently, Riot reported second quarter 2022 results and the company’s revenue increased by 112% on a year-on-year basis. This growth was primarily driven by the surge in Bitcoin production.
It’s worth noting that the company also reported a current hashing capacity of 4.9EH/s. Riot plans to increase hashing capacity to 12.6EH/s by January 2023. If this multi-fold growth in capacity is associated with Bitcoin trending higher, Riot stock is likely to go ballistic.
If the reversal for Bitcoin sustains, I would also consider holding the stock for the long term. The company has a healthy balance sheet and is positioned for the next leg of growth beyond Jan. 2023.
Lucid Group (LCID)
Lucid (NASDAQ:LCID) has also exhibited high volatility since its SPAC business combination listing. However, LCID stock seems to have found a bottom around $20 levels. With a short interest of over 20%, I believe that the stock is poised for a sharp rally.
It’s worth noting that Lucid recently reported results and the company slashed its production guidance for 2022. However, the stock didn’t have a big negative reaction to this news. It’s an indication that the stock is trading at attractive levels.
In terms of positives, the company has already seen 37,000 customer reservations. This would imply potential sales of $3.5 billion. Once supply-chain issues ease, a surge in production is likely to take the stock higher.
From a long-term perspective, Lucid has commenced construction of a factory in Saudi Arabia. Lucid has purchase commitments of 100,000 EVs from the Saudi government. The company also ended Q2 2022 with cash and equivalents of $4.6 billion. This provides ample flexibility to fund operations well into 2023.
With all these positives, LCID stock is likely to surge higher once supply chain issues ease. It’s therefore among the top heavily shorted stocks to consider.
Blink Charging (BLNK)
Blink Charging (NASDAQ:BLNK) stock has surged by 40% in the last month. However, the short interest is still 25% of the free float. I believe that a further rally is impending for the electric vehicle charging infrastructure stock.
For Q2 2022, Blink reported a 164% growth in revenue to $11.5 million. With acquisitions coupled with aggressive organic growth, the momentum is likely to sustain.
It’s also worth noting that the company still derives 74% of its revenue from North America. However, the revenue contribution from Europe has been increasing. With a presence in two big markets, the company is positioned for growth over the next decade.
On the flip side, the company reported a higher cash burn. I however believe that the markets will continue to focus on top-line growth. With an upside in services revenue, the company’s margin is likely to improve over the next few years.
Overall, EV charging infrastructure stocks look oversold. Even after the recent rally, BLNK stock is lower by 17% on a 12-month basis. Another leg of the short-squeeze rally seems to be on the cards.
On the date of publication, Faisal Humayun did not hold (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.