Watch These 3 Former Short-Squeeze Stocks for a Big Rally

Key Points

• Carvana has seen a significant drop in short interest. After a successful turnaround and 223% YTD gain, it has transitioned from a speculative play to a fundamentally driven stock.
• Affirm's short interest has dropped to 8.39%, signaling that despite recent gains of nearly 40%, it may no longer be a short-squeeze target.
• Upstart, with a 26% short interest and trading near key resistance, remains the most likely candidate for another potential short squeeze among the three.

In recent years, high short-interest stocks have become the playground for retail traders and investors, leading to massive rallies and squeezes. These speculative names, driven by a combination of social media buzz and perceived market inefficiencies, showcase extreme volatility, providing traders with an opportunity to profit from short squeezes. 

As the market hovers around all-time highs following the Federal Reserve's 50bps rate cut, capital inflows, and bullish sentiment might encourage investors to take risks on speculative stocks, including former short-interest darlings. The performance and strength of these high short-interest stocks can provide valuable insights into broader market cycles and risk appetite.

So, do several large-cap former short-squeeze favorites still possess the speculative nature and potential for short squeezes? Or have they become too fundamentally solid to fall into this category? Let’s explore three past short-squeeze stocks and assess their current positioning for further potential upside.

Shorts Exhausted in Carvana Amidst Successful Turnaround

A leader in the automotive resale market, Carvana Co. NYSE: CVNA, once on the brink of bankruptcy during the pandemic, has staged an impressive turnaround. After bottoming out at $3.55, the stock skyrocketed to a 52-week high of nearly $172. Carvana experienced significant bearish sentiment along its ascent and a heavy short interest, which fueled a substantial short squeeze. With more robust fundamentals and a profitable outlook, Carvana is up 223% YTD and has returned to profitability. The company’s recent earnings report on July 31st, 2024, showed $0.14 EPS and revenue of $3.41 billion, surpassing expectations.

However, short interest in CVNA has dropped considerably, down to just 6.91% as of September 15th, 2024, a sharp decline from over 20% in 2022 and 2023. With shorts largely exiting their positions, the stock's days as a speculative short-squeeze candidate seem behind as it has transitioned into a more fundamentally driven growth story.

Affirm No Longer a Short Squeeze Target, But Upstart Remains a Contender

Two other retail investor favorites, Affirm Holdings NASDAQ: AFRM and Upstart Holdings NASDAQ: UPST, have also seen impressive gains recently. Upstart surged 73% in the past quarter, while Affirm rallied nearly 40%. However, year-to-date (YTD) performance for both remains lackluster, with AFRM down over 15% and UPST roughly flat.

Affirm has seen a significant decline in short interest, with just 8.39% of its float shorted as of September 15th, far from the 20% levels seen in 2023. This indicates that AFRM may no longer be the target of speculative short squeezes it once was.

This decline in short interest may signal that bearish sentiment around Affirm is waning as the company continues strengthening its position in the expanding buy-now-pay-later space. Affirm’s growing partnerships and consumer base could drive long-term growth, offering potential upside despite its YTD underperformance.

Upstart, however, continues to maintain a high short interest at 26%, equating to over 23 million shares short. While this figure has decreased from 45% last year, it remains elevated. With UPST trading near a critical resistance level of $45, it appears the stock still holds potential for another short squeeze, making it the most likely candidate among the three for a speculative move higher.

Despite macroeconomic challenges like rising interest rates, Upstart remains well-positioned to benefit from the growing adoption of its AI-driven lending platform. The company’s innovative approach to credit risk assessment could lead to long-term growth as more lenders seek alternatives to traditional credit models. Combined with the potential for a short squeeze, UPST’s recent momentum and disruptive business model make it a stock worth watching for investors looking for both short-term gains and long-term upside.

Closing Thoughts: High Short Interest Signals Opportunity and Risk

While Carvana and Affirm have outgrown their speculative short-squeeze potential, Upstart remains a key contender for traders eyeing short-interest opportunities. With the market trading at all-time highs and investor sentiment shifting toward risk-taking, speculative stocks with significant short interest may again emerge as prime targets. However, investors should proceed cautiously, as the days of massive retail-driven short squeezes could be behind us for many of these names. 

Speculative traders, particularly retail investors aiming for a short squeeze, should remember that high short interest often signals underlying issues. A stock with unusually high short interest may have significant red flags or fundamental weaknesses.