The great thing about the market is that you can make money whether stocks are bullish or bearish. Some stocks have surged, and it may be too late for a long position. The good news is that some stocks have already topped, and shorting them may be profitable. Instead of looking only for stocks that have upside potential, you can diversify your portfolio by entering short positions. Several big stocks have dropped by 50% and may offer more downside. High short-interest stocks help traders gauge short stocks.
Quick Look at the Best Short-Interest Stocks:
The Best High-Short-Interest Stocks
Several stocks have proven to be volatile and in a downtrend for some time. A trend reversal is also possible. Whether you’re positioning to ride the downtrend or go long, a few high-short-interest stocks are worth exploring.
Heron Therapeutics Inc. (NASDAQ: HRTX): After surging for the first six months of 2018, Heron’s stock has been in a downtrend. Its market capitalization of $858.3 million has resulted in short sellers targeting this biotechnology stock with a small market cap.
Heron’s short interest is almost 34%. The days-to-cover from September 2021 to Jan. 11, 2022, has ranged from 21.3 to 17.6. Heron’s days-to-cover, published on Jan. 26, 2022, was 18.6. For the last 52 weeks, investors watched the share price tumble from $20.45 to $7.79. Since the share has been on a downward trend for several weeks, traders might be asking themselves if it’s time for the price to retrace or possibly reverse.
Blink Charging (NASDAQ: BLNKW): Blink’s stock ranged from January 2018 until November 2020, reaching as low as $1.50. The stock broke out of the range and went on an epic bull run, topping out at just over $64 in January 2021. Since then, the stock has fallen as low as $17.93.
The stock has recovered since then to reach $25.70. The question remains: is that the retracement of a downtrend or a reversal? Blink’s days-to-cover, published on Feb. 9, 2022, was 4.1. Is it possible that the price has broken out of a downtrend on the daily chart? Or is it retesting the weekly resistance before more downside?
Beyond Meat Inc. (NASDAQ: BYND): Beyond Meat’s shares closed 4% lower in value on Feb. 16, 2022, after an investment bank reduced its stock price target and issued a gloomy forecast for its future. In the last 52 weeks, Beyond Meat’s stock price tumbled from $183.75 to $53.10. Its days-to-cover ratio published on Feb. 9, 2022, was 5.2.
Whether the share has more downward movement will depend on if it breaks support. Currently, the share price is at a crucial support level that was held in March 2020. The price has tested this level several days since January 2022 and hasn’t managed to break through.
Beam Global (NASDAQ: BEEM): Investors who bought Beam Global stock in December 2019 watched the price surge more than 1,800% over the next year. Since reaching $73.78, Beam Global stock has slid to $10.19. And it’s not certain that investors’ woes are over.
The stock has recovered since then to $14.79. Investors will be wondering if the move up is only a retracement to $20 before a downtrend continuation. With a market cap of only $133.1 million, it’s easy to see why sellers targeted this stock.
Arch Resources Inc. (NYSE: ARCH): Investors who bought Arch Resources stock in April 2020 have enjoyed a return of 473%. The stock has been on an uptrend since late 2020, and investors must be wondering how much more steam it has in it. Could a retracement of the bull run be imminent, or is the stock close to a reversal?
Arch Resources has a market cap of $1.8 billion, and the days-to-cover published on Feb. 9, 2022, is 9.7. One of the key catalysts for the positive price movement is the company’s earnings.
What is a High Short-Interest Stock?
A stock with high short interest is a shorted stock with a large portion of the stock outstanding. It can even exceed the outstanding amount. The general market sentiment is that a stock with high short interest is on a downward trajectory. Most traders believe that high short-interest stocks are bearish and should be shorted.
Significant changes in short interest signal to investors that the stock may be bullish or bearish. Short interest is the number of shares sold short that traders have not closed. It’s expressed as a number or a percentage. An increase in short interest could signal to traders that the stock has become bearish. And a decrease could mean that a long position is imminent.
Some traders believe that extreme short interest levels signal a buy position. Short interest is a market sentiment indicator.
Benefits of a High Short-Interest Stock
You don’t have to wait only for buy signals, as shorting a stock is also an opportunity to profit. High short-interest stocks provide several benefits to bullish and bearish traders.
Indicates market sentiment: Traders use market sentiment to gauge the potential stock direction. A significant increase or decrease in a stock’s short interest serves as an indicator of market sentiment to investors.
A rise in a stock’s short interest from 20% to 30% usually means that the market has become more bearish on the stock. In cases like that, 50% more investors believe that the stock’s value will weaken.
Let's imagine that you bet against the market: When market sentiment is bearish, some traders believe that’s a buy signal. Their sentiment is that extreme short interest is a contrarian indicator. Stocks with extremely short interests are prone to short squeezes — triggering rapidly rising prices because lots of short-sellers are holding positions.
When a short squeeze occurs, many short traders buy back the stock to cover their positions and avoid losses. That action can surge the price even higher.
In and out quickly: You can convert short interest into a days-to-cover ratio — the number of short shares divided by the average daily trading volume. That calculation gives you the average number of days for the shorts to cover their position.
The higher the days-to-cover, the greater the bearish sentiment is. Low days-to-cover means that bearish traders have a short period to cover their positions. Short interest guides traders about how long to hold their positions and enables them to spot trades that they can get in and out of quickly.
Drawbacks of a High Short-Interest Investment
Getting into high short-interest investments doesn’t guarantee profits because market sentiment is bearish and a stock’s short interest is high. These stocks can rise in value.
No opportunities to go long: Traders who successfully use short interests to take bearish profitable trades tend to stick with short positions. They’re enticed by the profits earned from shorting stocks and tend to seek mostly short trades.
That potentially results in losing profits from long trades they could have entered. Traders should seek buying and selling opportunities.
Stocks are volatile: Stocks that have been in a downtrend for some time could reverse quickly. They’re prone to short squeezes and could shoot up. Some traders use the short interest that exchanges publish monthly, so the information is slightly outdated. The real-time short interest could differ vastly from the reports.
Should you Buy Stocks with High Short Interest?
It’s not uncommon for stocks with high short interest to be in a short squeeze — triggering rapidly rising prices because lots of short-sellers are holding positions. Traders use short interest to gauge market sentiment. And some traders see high short interest as a potential buy signal.
Traders in short positions could be forced to liquidate and cover their positions by buying the stock. If many short sellers buy back the stock, the price could surge. The difficulty lies in forecasting such a position. When the short interest of certain stocks reaches extreme highs, some traders believe that is a strong buy signal.
Stocks That are Shorted the Most
Whether a stock has high volatility or has been in a downtrend for some time, certain stocks tend to be shorted the most.
Some of the most shorted stocks:
- Gitlab Inc. (NASDAQ: GTLB)
- Allbirds Inc. (NASDAQ: BIRD)
- Cortexyme Inc. (NASDAQ: CRTX)
- Blink Charging
- Gogo Inc. (NASDAQ: GOGO)
- Cassava Sciences Inc. (NASDAQ: SAVA)
- EVgo Inc. (NASDAQ: EVGO)
- Arcimoto Inc. (NASDAQ: FUV)
- Intercept Pharmaceuticals Inc. (NASDAQ: ICPT)
- Shift Technologies Inc. (NASDAQ: SFT)
Gitlab’s previous short interest was 34.76% and is currently at 62.19%. That’s a significant increase in the short positions. But traders should use other metrics and chart tools to determine their positions. Short interests are helpful, but they’re more powerful when combined with other strategies. A comprehensive list of most shorted stocks is available on Benzinga.
Frequently Asked Questions
What are the best high short-interest stocks?
Check out the article above to find Benzinga’s list of the best short-interest stocks.