Short-squeeze candidates aren’t very hard to come across in this environment. The current macroeconomic environment has ensured there is no scarcity of cash-burning businesses that are barely afloat. Thus, the bearish sentiment behind these companies has caused many stocks to have unusually high short-interest ratios. Such high short-interest ratios can make these stocks well-positioned to go on a tear to the upside, if their underlying businesses report any slight improvement or good news.
Conversely, by betting on such a thing happening, you’ll be investing in stocks that are perpetually bleeding red ink. A short squeeze is not something that commonly happens, and it is safe to say that you’ll be making more losses simply by investing in heavily-shorted businesses. They’re being shorted for a reason.
With that in mind, my list of top short-squeeze candidates to buy in May are companies that aren’t at material risk of bankruptcy and have a clear long-term growth trajectory with unreasonable amounts of short interest.
Here are three short-squeeze candidates worth keeping an eye on right now.
Root Inc (NASDAQ:ROOT) is a car insurance startup that has been struggling in the stock market since its IPO in 2020. However, since March this year, ROOT stock seems to have bottomed out, trading sideways at the $4-5 range after reaching a low of $3.47.
The biggest factor behind the bearish sentiment with this company is its revenue decline since Q2 2022. The average revenue decline for the past four quarters is nearly 20%, and that has caused the stock to trade at a massive discount, with a price-to-sales ratio of only 0.23-times. That’s ranked better than 91.75% of its peers. But that’s not the only thing that makes me believe ROOT offers good value right now.
The company has been slowly narrowing its losses, and its revenue decline in Q1 was less-than-expected, at 17.65%. Analysts expect this revenue decline to reverse course and turn positive, with the company projected to grow at a 13.9% clip next year. Additionally, losses per share are expected to improve, narrowing to -$12.34 from -$21.11 last year. I believe even better results are possible here, since the company has outperformed earnings estimates over the past four quarters.
And unlike many other short-squeeze stocks, the bankruptcy risk here is negligible. The company has much more cash than it has debt, which is enough to cover its losses until it reaches profitability. Thus, I believe ROOT stock is a steal at this range. Once year-over-year sales metrics reach positive territory, I expect substantial appreciation here. A short squeeze is also possible, since the short interest currently sits around 21%.
Luminar Technologies (LAZR)
Luminar Technologies (NASDAQ:LAZR) is another short-squeeze candidate that seems to be changing course. The stock is up 20% since its Q1 earnings report, outperforming sales expectations and delivering 111.7% revenue growth year-over-year. Two days before the Q1 report I noted, “Personally, I believe explosive gains are possible in the near term, especially if its Q1 report surprises.” The 20% appreciation is certainly not explosive, but I believe it is a start to a long-term uptrend, as Wall Street reconsiders LAZR stock.
The concerns around Luminar’s losses are severely overblown. The company’s sales growth here is remarkable, with triple-digit growth expected for the next five years. Sure, there may be losses, but these losses are tolerable and normal for a startup that is growing at this pace. The company’s management also sees more than $300 million in liquidity by the end of this year, along with a positive gross margin. By the end of 2025, Luminar Technologies expects to break even, and Luminar’s growth performance should be enough to take on additional debt if needed.
I believe there is a strong possibility of the stock delivering multibagger gains once Wall Street is more comfortable with growth-at-any-cost companies like Luminar, especially when triple-digit growth is expected for at least the next five years.
The environment is unlikely to remain tough forever. In cases like this, sacrificing short-term profitability to capture more of the market for the long-run is a good move for startups that can pull off strong sales growth.
Beyond Meat (BYND)
Beyond Meat (NASDAQ:BYND), a leader in plant-based meats, has seen its stock price under significant pressure, even through the boom in 2021. However, I believe sentiment might finally be improving, as the BYND stock continues to change hands at bargain levels.
The recent bump in its stock price is due to its Q1 report. Beyond Meat reported revenues of $92.24 million. However, the company’s operating loss was $57.72 million, and its net loss was $59.04 million. Beyond Meat has slowly narrowed its losses over the past two quarters, and its current cash position of $273.6 million seems to be enough to sustain the company until it reaches profitability. Operating cash flow is also expected in the second half of 2023, and analysts expect 11.6% sales growth next year. Thus, I can see this stock bottoming out at the $10 range, since I don’t see too much dilution once the operating cash flow turns green.
Short interest at 33.3% could also position BYND stock for a short squeeze. It is already at a level where you’d start closing these short positions, since even some pessimistic price targets do not go below $10. The average price target from analysts in 2023 is around $15, with only one $5 price target put forward from a Goldman Sachs (NYSE:GS) analyst back in Nov. 2022.
On the date of publication, Omor Ibne Ehsan did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.