Upstart's worrying short interest could set off a quick rally

Key Points

• The GameStop saga may have left a bitter taste behind the 'short squeeze' strategy. Still, one failed mission will not erase years of successful others.
• Upstart is next on the podium to make its case as a stock that could be sent flying; after all, its short interest is double GameStop's at its peak. 
• Smart money understands the stakes, and analysts have just revealed where the big boom may come from.

Hopefully, the name GameStop NYSE: GME doesn't outright send you into post-traumatic stress; if you did participate in that craze of stock during COVID-19, thank your lucky stars if you were on the right side of that trade. You see, the company may or may not have been worthy of those peak valuations, but the reason it rallied so hard is undeniable.

The stock's short interest, which measures the amount of shares (as a percentage of total available shares) sold short, was one of the highest at the time. Having a high short interest in a stock that ticks up is like running through a dynamite factory with a lit box of matches.

You can run through once, maybe twice, but eventually, luck runs out, and the big boom will be heard a couple of blocks over. Upstart NASDAQ: UPST has a dangerously high short interest, and markets are not ready to let this stock fall; when this clash between high hopes and negative dollars happens, this will be a stock you'll want to own.

Hurry, take off is nearing 

2023 has been a roller coaster of a year in financial markets, with wild emotional swings from recessions over the horizon, rising interest rates, and unaffordable items at the counter to a late-year rally that seems to have brought back all kinds of hopes into those brave enough to stay bullish.

The truth remains the same: the VIX has reached its lowest levels since 2019, meaning that finding good deals is harder than ever since the booms brought by COVID. For you, this means finding a stock that will really move! Otherwise, stick to a reliable list of value stocks and hold until the beast awakens.

You are here because time is money, and if you have no time to twiddle your thumbs, then Upstart may be the best pick to consider in the technology stock sector. After all, you want to buy into a winning space, right? The Technology Select Sector SPDR Fund NYSEARCA: XLK may be it.

With an outperformance of 30.6% against the S&P 500 on a year-to-date basis, your job now becomes to find those stocks that are lagging behind. Or, as Jessee Livermore used to say, "Soldiers always follow the generals," meaning smaller stocks will eventually catch up to the big players in a sector.

Here's an interesting stat: when comparing Upstart's price action against its peers, a massive discount appears right away. This stance is only expanded when pinned against competitors like C3.ai NYSE: AI and SoFi Technologies NASDAQ: SOFI, a discount that may set off the bomb hidden underneath the hood.

Danger close

Upstart's short interest is 45.1% of its float today; GameStop's highest was 24.5%... You should be leaning in now to ensure this is not a typo; spoiler alert: it's not. Considering Upstart has double the short interest of this infamous short squeeze play, it could quickly claim its place in history as well.

Short interest matters because when you short a stock, it literally means you are short shares. Just like you can say, "Hey bud, I'm short a couple of bucks, can you spot me? I'll cover you (pay back) tomorrow." People borrow shares (45.1% of them) of Upstart to bet on their decline.

But what happens if, instead of going down, they go up? Well, their losses can quickly mount up to significant levels. The only way to close their position is to repurchase the stock, which creates immediate buying pressure and builds on the upward momentum. It is the perfect storm to bring a stock shooting up.

Now, considering that the industry's average price action is at 86.6% of its 52-week high, Upstart's 47.0% makes it the worst performer, likely leaving no more room for it to move lower. But how can you know that it is bound to go up and trigger all these shorts buying back in?

Analysts expect earnings to grow by 190.2% in the next twelve months, the largest jump in the peer group. C3.ai and SoFi only expect respective jumps of 92.9% and 115.0%, respectively. So, if analysts are correct, and this 'loser' of stock ends up fulfilling these projections, the worst performer could quickly catch up to the generals.

There has to be a reason Morgan Stanley NYSE: MS increased its position in the stock by 65.6% in November. Could 'smart money' be already placing their bets behind this possible short squeeze?