Three of the favorite words to meme-stock investors are “short-squeeze stocks.”
These are stocks where short sellers, betting for a fall in the company’s share price, are squeezed out of their short positions due to an unexpected, rapid increase in the share price.
The higher the short interest, the greater the potential short squeeze. As Investopedia points out on its educational page about short squeezes, Tesla (NASDAQ:TSLA) had an 18% short interest in late 2019. TSLA stock quadrupled and the shorts lost billions.
There are occasions where it makes sense to buy short-squeeze stocks.
However, you’ve got to understand that the best-laid plans don’t always come to fruition. Plenty of AMC Entertainment (NYSE:AMC) shareholders have bet that the shorts were wrong about the theater chain’s prospects. Trading in penny-stock territory, investors could be waiting for a long time for a recovery in its share price.
Which short-squeeze stocks to buy?
I’d look for three things: 1) a high short interest, 2) a smallish float, and 3) a profitable business.
Keeping that in mind, here are my three short-squeeze stocks to buy now.
B. Riley Financial (RILY)
According to MarketWatch data from the end of January, B. Riley Financial (NASDAQ:RILY) was the third-most shorted U.S.-listed stock with a short interest of 10.38 million shares, 62.82% of its float.
The Los Angeles-based investment bank is not the type of company you would expect to see at the top of a list of short-interest stocks. But here it sits.
It got to this point by associating with Brian Kahn, the CEO of Franchise Group, which Kahn took private for $2.8 billion in August 2023. Its brands include The Vitamin Shoppe., Sylvan Learning, Wag n Wash, etc.
Kahn was a B. Riley client. B. Riley invested $216.5 million in the management-led buyout for 31% of the company. In November 2023, the Department of Justice announced that Prophecy Asset Management co-founder John Hughes pled guilty to defrauding dozens of investors of nearly $300 million. Hughes named Brian Kahn as one of two co-conspirators.
On Jan. 22, Kahn stepped down as the CEO of Franchise Group, moving aside while the Securities and Exchange Commission looked into some of his business dealings. Kahn’s lawyers suggest that their client was defrauded out of tens of millions of dollars by Prophecy.
In the trailing 12 months ended Sept. 30, 2023, B. Riley had an operating income of $186.8 million with $1.63 billion in revenue. It lost $75.8 million in the third quarter due to unrealized losses from its equities portfolio, including its investment in Franchise Group.
The short sellers smell blood. If they’re wrong, the short squeeze could be an epic one.
Canada Goose (GOOS)
While Canada Goose (NYSE:GOOS) stock is up more than 8% in 2024, it’s down 37% over the past year and 75% over the past five years. It’s fallen from grace.
The apparel brand has a short interest of 15.52 million shares, which is 31.03% of its float. Based on a 65-day average volume of 1.57 million, it will take nearly 10 days for shorts to cover.
On Feb. 1, the company, best known for its oversized, puffy parkas, reported its Q3 2024 results. There was a little of everything in the report, good and bad. On the plus side, total revenue was up 5%, excluding currency, to 609.90 million Canadian dollars ($449.2 million), with its direct-to-consumer (e-commerce and brick-and-mortar) revenue rising 14% over Q3 2023. It now accounts for 84% of revenue. In addition, Asia Pacific revenue was up 62% year-over-year.
The downside: every other region experienced lower sales in the quarter, and its wholesale revenues fell by 30% compared to last year. It lowered its guidance for all of 2024. It now expects revenue of 1.31 billion Canadian dollars ($965 million) at the high end of its outlook, down from 1.40 billion Canadian dollars ($1.03 billion).
Also, its expected adjusted earnings per share are 87 Canadian cents ($0.64), was down from one Canadian dollar ($0.74).
Currently trading at 19.7x earnings, its stock could hardly be called cheap, but it’s a big leap from expensive to a write-off. With Asia coming around, it’s barely that.
Lovesac (LOVE)
Lovesac (NASDAQ:LOVE) has a short interest of 3.75 million shares, 28.21% of its float. Based on a 65-day average volume of 317,930, it will take nearly 12 days for shorts to cover.
The furniture maker, known for its Sactionals modular couches and Sacs beanbag chairs, has disappointed investors. It went public in June 2018 at $16, closing up 50% on its first day at $24. More than five-and-a-half years later, it’s only $1.50 higher, although it did get as high as the $90s in 2021.
If I were to bet on the cause of so many people shorting its stock, it would most likely be its inconsistent profitability.
While its revenue through the first nine months of 2024 was up 9.0% to $449.8 million, its adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) was cut by more than half, to $5.7 million, a lowly 1.3% EBITDA margin. That’s grocery store low.
One metric that looked very healthy was its inventory level at the end of October. It was $116.6 million, down from $154.5 million a year earlier and $119.6 million as of Jan. 29, 2023. While its inventory went down, its sales went up.
The company faces class action lawsuits over August 2023 restatements to its financial statements regarding last-mile freight expenses. As a result, its fiscal 2023 operating profit was overstated by $1.5 million to $2.5 million, while its net income was overstated by $1.0 and $2.0 million.
Usually, I’d say it’s not a big deal. However, when profitability remains difficult for the company, these numbers become significant when making a decision about investing in its stock.
I think it will blow over, and I don’t see it as a major infraction, but a short squeeze is probably not in the cards in February. That said, I don’t think it makes an excellent short as long as its products remain in consumer demand.
On the date of publication, Will Ashworth 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.