3 High Short Interest Stocks Set for a Squeeze as Rate Cuts Near

Key Points

• As rate cuts loom, three stocks with high short interest could trigger a short squeeze on bullish price action.
• Fundamental tailwinds are there to push the envelope for these companies, setting up potential moves higher that could trigger short squeezes later on.
• Wall Street analysts have placed aggressive price targets and EPS growth forecasts on these names, wrapping up the bullish thesis behind these potential squeezes.

When the market gets too long or too short in any given set of stocks or asset classes, investors must eventually watch out for the changing tides. Just like anything that is priced openly to the public, stocks that run out of buyers will need to see lower prices to attract new business, just like stocks that run out of sellers need to see higher prices instead.

Today, a few stocks stand out as potential names that could be running out of buyers soon. The catalyst to bring higher prices to them and shake old sellers off is the promise of interest rate cuts coming from the Federal Reserve by September 18th, 2024. As old sellers stick to these stocks, hoping for lower prices to come along and boost their profits, they could face a rude awakening if a rate cut brings higher prices.

The stocks investors should keep an eye on for this potential trend are SoFi Technologies Inc. NASDAQ: SOFI as part of the mortgage market recovery on lower rates, Chesapeake Energy Co. NASDAQ: CHK as better business conditions ahead potentially boost oil prices, and finally consumer discretionary player ON Holdings NYSE: ONON riding on the strength of recent quarters reported by peers.

Why Analysts Predict Triple-Digit EPS Growth for SoFi This Year

It starts with SoFi's business model, which, according to the company’s latest quarterly earnings results, now holds up to $15.8 billion worth of capital lent to consumers. These loans, like bonds and mortgages, do well when interest rates come down, as the relationship between price and yield is inverse.

Knowing that these coming rate cuts could potentially boost the company’s book value through a richer balance sheet, Wall Street analysts also forecast up to 190% growth in earnings per share (EPS) for the next 12 months, as SoFi could sell these loans at higher prices and realize a profit.

Short sellers have raided this stock, bringing the net short interest up to 19% of the overall float, the highest since the first quarter of 2024. This means that if the stock were to get closer to the price targets set by Deutsche Bank, a 52.7% rally from today’s price could trigger a short squeeze and turn that run into a much bigger move.

Considering that the mortgage market index is now at 1996 lows, investors could assume that many would-be homebuyers are sitting on the sidelines, waiting for better financing terms to hit the market and seize the opportunity.

The level of institutional buying, which was up to $748.6 million over the past 12 months, gives retail investors another vote of confidence to consider SoFi stock. Leading the way, Dimensional Fund Advisors boosted their position by 263.3% as of August 2024, netting their investment at $86.5 million, or 1.2% ownership in the company.

Chesapeake Energy Emerges as the Top Oil Bet Following Buffett's Lead

After Warren Buffett bought up to 29% of Occidental Petroleum Co. NYSE: OXY, lots of traders and investors wondered whether this oil bet would pay off, especially as the price per barrel has now gone below $70. While the timing might be flawed, his thinking is much better.

Rate cuts could boost both business and consumer activity and represent a potentially stronger global economy. These conditions are typically synonymous with higher oil prices, helping Chesapeake analysts land an EPS growth forecast of up to 303.8% this year.

As those at Stephens place a price target of $118 on Chesapeake Energy stock, the upside is set at 67.6% from where the stock trades today.

Facing all of this upside could trigger a short squeeze in the coming months, and here’s why.

Bears took the short interest in Chesapeake stock as high as 18.9% of the overall float.

If the stock gets even a whiff of upside momentum on improving oil prices, which is essentially Buffett’s bet, then the upside move could be significantly amplified by short sellers closing their positions.

Lower Rates Poised to Boost Consumer Activity in ON Holdings

Achieving the scale and growth that Lululemon Athletica Inc. NASDAQ: LULU has done in the athleisure niche of the consumer discretionary sector is only an example to follow. The newest player in the space is now ON Holdings, and it has been making progress toward becoming a recognized brand.

But that’s the qualitative side; the quantitative side will reveal the potential trade opportunity present in the next couple of quarters for this stock. With a price target of $52 a share set by analysts at HSBC on September 20204, ON stock could face a net upside of up to 15.5% from where it trades today.

Even though this stock doesn’t hold the sort of upside that the others on this list do, a short interest of 14% places it right along the potential rate cut short squeeze scenario. Why? As consumers have more credit available at better rates, brands like ON and Lululemon tend to perform well.

This could be why the stock now trades at a price-to-earnings (P/E) ratio of up to 101.0x today, a significant premium above the discretionary sector’s average valuation of 12.2x.

Typically, markets are willing to pay a premium for the stocks they expect to perform the best within a given sector, a sign of confidence for retail investors to consider.