Goldman Sachs Highlights 3 Top Short Squeeze Stocks to Watch

Key Points

• Goldman Sachs has now posted its list of the top 20 short squeezes, with three special interest items for investors to consider today.
• Part of a broader tailwind in the economy, these companies offer investors a double-digit upside and enough potential for a short squeeze ahead.
• Wall Street analysts agree with these trends through their price targets set today.

The stock market can trap investors who get either too long or too short on a specific company or trend. Whenever this happens, the market has a way of correcting these imbalances through sharp rotations. Those who are too long on a stock or trend and see a sharp selloff will likely run for the exit, creating additional selling pressure on the trend.

The inverse is also true for short sellers. When too many people—and too much capital—go on the short side, any time there is a sharp rally, these short sellers are forced to exit their positions, which involves buying back the stock these short sellers had borrowed. Without diving into the weeds of what short selling is, all investors need to know is that closing large short positions means buying pressure for the underlying stock.

Knowing this, it would be beneficial to pay attention to the new list of top 20 potential short squeezes in the market today, compiled by analysts at Goldman Sachs. These are the stocks that could make a run when and if short sellers start to cover their positions, names like Chewy Inc. NYSE: CHWY for the consumer staples sector, Expedia Group Inc. NASDAQ: EXPE for new travel trends, and finally First Solar Inc. NASDAQ: FSLR for an alternative to the energy sector.

Why Chewy Stock Isn't a Good Bet for Short Sellers Right Now

Most investors tend to treat Chewy stock as part of a technology sector name or even a consumer discretionary player. However, this couldn't be further from the truth. No matter whether the economy is booming or busting, pet owners will likely always find room in their budgets to take care of their pets' needs.

With this in mind, it shouldn't be surprising to see Chewy's financials show a return on invested capital (ROIC) rate of up to 28.5% as of the past 12 months. This is only achievable by a combination of pricing power and stable cash flows built into the business model itself.

Considering that the stock now trades at a low 72% of its 52-week high today, it could be regarded as part of a group of value stocks that may outperform in the coming quarters, especially as more investors keep discounts in mind during these uncertain market conditions.

Wall Street has a similar opinion about Chewy stock. Analysts at TD Cowen recently initiated coverage on the company with a "Buy" rating, this time placing a $38 a share price target on the stock. Chewy would need to rally by as much as 35.2% from where it trades today to prove these new valuations right.

If the company can deliver this sort of upside, it could trigger a significant short squeeze, mainly since the short interest in Chewy is as high as $450 million today.

Expedia's Recent Momentum Could Soon Spark a Major Short Squeeze

Over the past 12 months, shares of Expedia Group stock have rallied over 72% to outperform most peers in the industry. Now that the stock trades at up to 98% of its 52-week high today, investors can see enough momentum to potentially bring on a short squeeze.

This is especially the case considering that the company carries up to $950 million in short interest, which could return to the stock if these short sellers are forced to cover their positions. As a potential catalyst, markets can consider the Federal Reserve (the Fed) 's recent start to cut interest rates.

Lower interest rates could increase travel and leisure demand for stocks like Expedia. Investors can consider these trends when considering the record numbers seen by the Transportation Security Administration (TSA) in recent weeks.

To solidify the trends helping investors decide whether to back Expedia Group tock or not, investors can see the recent institutional buying coming from Pacer Advisors, which boosted its positions by as much as 36.8% as of the past quarter, bringing its position to $334.4 million today.

Inflation Trends Could Boost Solar Energy Demand and Trigger a Short Squeeze in First Solar Stock

Now that Stanley Druckenmiller and Paul Tudor Jones, arguably some of the best investors and traders in history, have agreed to short the bond market, investors have something else to consider.

This new view suggests that inflation might not only go back up but might actually stay higher for longer than most expect. This includes the price of commodities as well, where potentially higher oil prices could cause fuel costs to rise so much as to make alternative sources more attractive.

This is where First Solar Energy comes into play, as solar becomes an attractive alternative. This new potential demand brought those at Bank of America to reiterate their “Buy” rating for the stock, this time accompanying their views with a $321 share price target.

Investors now face a potential upside of 59.4% from where the stock trades today, which puts short sellers in danger of triggering a major short squeeze. This is especially the case considering that the short interest in First Solar stock has risen to $1.2 billion today.