Wall Street Scans Short-Squeeze Targets Amid Reddit ‘Revolution’
(Bloomberg) -- There are dozens of ways to pick stocks, but few have been as unconventional -- or as successful -- as the coordinated short-squeeze being deployed by Reddit’s army of day traders. Now, Wall Street is scanning for which of the market’s most-hated shares could be targeted next.
It’s simple, though not necessarily intuitive: identify a company with huge levels of short interest, and pile in. GameStop Corp. -- which entered the week with 139% of its available shares borrowed and sold short, according to data from S3 Partners -- served as a proof of concept. The video-game retailer has soared nearly 700% in five days forcing the likes of Citron Research and Melvin Capital to abandon their bearish positions.
Now, analysts are casting a wary eye toward the stocks that could be next. The list of potential targets includes Vir Biotechnology Inc. and SunPower Corp. which have short-interest levels above 30% of their floating shares, according to S3 data. Meanwhile, D.A. Davidson analysts wrote Wednesday that companies such as Fastly Inc. and J2 Global Inc. could come into the crosshairs, given their high levels of short interest.
“You don’t see revolutions happening, they just occur, and I think we’re in a moment like that in financial history,” Bob Sloan, S3 founder, said in a phone interview. “The hard thing to measure is how much buying power is in these bulletin boards.”
Shares of Vir surged as much as 82% to hit an all-time high of $141 on Wednesday, while Fastly and J2 Global were higher as well. SunPower was the laggard, with prices dropping about 3%.
The rally in those stocks has dealt blow after blow to short-sellers. A Goldman Sachs Group Inc. basket of the most heavily shorted stocks has surged over 50% in January for it biggest monthly gain since at least 2008, or as far back as data for the index goes.
The hunt for heavily shorted stocks is being led by the Reddit forum WallStreetBets, which boasts roughly 2.8 million members. Users there have mobilized on the likes of GameStop, BlackBerry Ltd. and AMC Entertainment Holdings Inc., while delighting in Melvin Capital’s capitulation.
The short-squeeze strategy has also engulfed the options market, where the smallest of traders -- those who buy or sell 10 or fewer contracts at a time -- have bought a record amount of bullish calls. That’s theorized to have created a bullish feedback loop of sorts, as the dealers selling the call contracts buy the underlying stock as a hedge.
Amid the frenzy, Internet searches for “short squeeze” have spiked, according to Google Trends. On a scale from 1 to 100 -- with a value of 100 indicating peak popularity for the search -- the gauge now sits at 100.
“They’re not looking at anything fundamental at all,” said Matt Maley, chief market strategist at Miller Tabak + Co. “They’re just buying the most-shorted names.”
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