For medium to long-term investors, it’s essential to screen fundamentally strong businesses when looking to add exposure to a given sector or type of stock. However, from a trading perspective, an under-performing stock can be a good investment within a limited time horizon. Among various trading strategies, one that’s recently gained steam of late is to focus on heavily shorted penny stocks or growth stocks.

Based on past evidence, a small piece of news can trigger a big move in heavily shorted stocks. Companies with high short interest can see what’s called a short squeeze when the market rallies. Dip buying among speculators can induce short sellers to cover their positions (which means buying the stock they borrowed and sold). This can lead to impressive surges in a given stock over a very short amount of time.

Indeed, this strategy is highly risky. However, investors can easily see returns of 50% or 100% in the blink of an eye. For traders, it may makes sense to allocate a small portion of one’s portfolio to such higher-risk plays, if the likelihood of a short squeeze rally is high.

These are seven of the most heavily shorted penny stocks I’d put on the watch list right now, for those looking to add some risk right now.

Ocugen (OCGN)

Overall, I am bearish on Ocugen (NASDAQ:OCGN) stock for the medium to long term. However, after a 67% correction in 12 months, a short squeeze rally seems to be on the cards, with this stock’s short interest still hovering around 20% of its float.

If we look at company-specific catalysts, Ocugen announced positive top-line data for its covid-19 vaccine candidate. Further trial news can boost the stock and translate into a short-covering rally. However, any upside is likely to be short-lived as the covid-19 vaccine is unlikely to find takers in a saturated market.

From a financial perspective, Ocugen has the cash to fund operations through Q4 2023. With no internal cash flow visibility, equity dilution is in the cards for the second half of 2023. This is another factor that will likely take OCGN stock lower, though there’s no indication how high this stock could surge in a short squeeze scenario this year.

Arrival (ARVL)

Arrival (NASDAQ:ARVL) is another option for investors seeking heavily shorted penny stocks to buy. After plummeting by 90% over the last 12 months, a short-squeeze rally seems likely. That’s particularly true, given this stock’s very high short interest, which is still above 20%.

In my opinion, over the long-term, Arrival is unlikely to survive in a highly competitive EV market. The company’s growth plans have been delayed, which has dented investor confidence. Additionally, the scaling of Arrival’s business also remains questionable, with the company pursuing a micro-factory model.

Recently, Arrival announced a 50% reduction in global headcount. This will help in reducing the company’s cash burn. However, with Arrival set to start production of its electric van in 2024, capital needs may pick up over the course of this year.

Thus, it’s likely Arrival will look to raise capital at some point this year. Until then, it’s possible that speculators will bid up this stock, and if the company can secure financing at favorable terms, that could be the catalyst to drive such a rally. Like the other names on this list, Arrival is speculative. This company isn’t likely to produce positive cash flow for a number of years, and its fundamentals remain questionable.

Mullen Automotive (MULN)

Mullen Automotive (NASDAQ:MULN) stock is another EV name poised for a short squeeze in the foreseeable future. Additionally, it’s also among the EV names unlikely to survive as competition intensifies. This reality has bled into MULN stock, which has plunged by 90% in the last 12 months. However, with investor confidence low, perhaps now’s the time for speculators to consider adding some exposure.

There are some potential near-term catalysts to consider with this stock. Last month, Mullen announced a purchase order worth $200 million for the delivery of 6,000 Class 1 EV cargo vans. The company also partnered with Loop Global for EV charging services and solutions. Mullen has been working on solid-state batteries for its vehicles.

I see diversification at an early stage of growth as more of a headwind than an opportunity right now. Indeed, the markets are unimpressed. Free cash flow is still years away, and dilution will impact stock sentiment. Accordingly, MULN stock seems deeply oversold and can potentially see a near-term bounce before resuming its move to the downside.

Canopy Growth (CGC)

Canopy Growth (NASDAQ:CGC) stock is an exception to this list of near-term trades. That’s because I think investors can also safely add some exposure for the long-term.

After touching lows of $2.10 in December 2022, CGC stock has trended higher, currently trading around $3.15 per share. That said, short interest for CGC stock remains high at 18%, and I expect another round of short-squeeze rallies to take this stock higher in the near-term.

One catalyst that investors have certainly been waiting for with Canopy Growth is federal legalization to take hold in the U.S. While there is no timeline on legalization right now, it’s worth noting that the first cannabis bill has been introduced in the new Congress. Canopy has set up a U.S.-domiciled holding company, which will support expansion in the country. Federal legalization would simply accelerate the company’s growth plans further.

From a financial perspective, Canopy Growth reported cash and cash equivalents of $1.1 billion as of September 2022. The company, therefore, has ample flexibility to navigate an extended period of cash burn. Canopy has already made strides in cutting costs, making potential EBITDA margin improvement likely looking forward.

Tattooed Chef (TTCF)

Tattooed Chef (NASDAQ:TTCF) stock has corrected by almost 90% over the past year. Indeed, it’s clear that short sellers have helped this stock’s decline, given the company’s relatively high short interest at the time of writing. With more than 30% of TTCF stock sold short, those betting on a widespread short-squeeze rally may want to pick up some shares right now.

There are fundamental reasons for Tattooed Chef’s recent decline as well. The company’s recent Q3 earnings report did not inspire investor confidence. The company reported net revenue of $54.1 million. Unfortunately, the company’s EBITDA loss was massive, coming in at $25.1 million. That’s the kind of cash burn that can take a stock down quickly.

Given this relatively high cash burn rate, investors are right to have a rather pessimistic outlook. The company has guided for positive EBITDA and cash flow by the first half of 2024. However, that’s still several quarters away, and it remains to be seen if the company can achieve its guidance, considering its declining revenue.

Tattooed Chef has also indicated that the company will raise funds through debt or equity. I think the markets are unlikely to react positively to this news. Accordingly, any near-term rally ought to be met with immediate profit-taking for those looking at TTCF stock as a trade here.

AppHarvest (APPH)

AppHarvest (NASDAQ:APPH) is among the most heavily shorted penny stocks to buy. Further, APPH stock is not purely speculative. Some long-term positions can be considered in this vertical farming play.

Even after some rallies in the recent past, APPH stock has corrected by 42% in the last six months. However, with short interest still above 20%, there is a case for a short squeeze rally with this company.

In terms of the company’s business, AppHarvest claims to have a business model that requires 90% less water for vertical farming. Additionally, its yield is likely to be 30-times higher than traditional agriculture methods.

Currently, the company has a four-farm network with a total area of 165 acres. Most of the farm network has been added towards the end of 2022. Therefore, AppHarvest is poised for solid revenue growth in 2023 and beyond.

At the same time, there is a strong case for EBITDA margin improvement, as the company’s operating leverage improves. I think it makes sense for investors to wait for quarterly numbers before adding any substantial exposure. That said, given the short squeezes we’ve seen of late, there’s a near-term case to be made for this stock as well.

Bed Bath & Beyond (BBBY)

Bed Bath & Beyond (NASDAQ:BBBY) has the highest short interest as a percent of free float among the names discussed. After having plunged by 80% in 12 months, there now seems to be some hope for a reversal rally. Indeed, BBBY stock is higher by 11% in the last month, reflecting some of this sentiment..

Of course, it’s a high-risk option in this market, considering the fact that the company appears to be nearing bankruptcy. For Q3 2022, the company’s net sales declined by 33% on a year-on-year basis, with comparable store sales falling by 32%. Further, Bed Bath & Beyond reported cash used in operations of $307 million. With significantly stressed financial metrics, the retailer’s outlook remains very pessimistic.

That said, this company is one that’s still attempting to dig its way out of this hole. In January, the company launched a new brand, “Ever & Ever.” It remains to be seen if the company can avoid bankruptcy and boost its liquidity profile. But for traders, this is a stock that will clearly remain in focus, given its volatile moves thus far this year.

Penny Stocks

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Read More: Penny Stocks — How to Profit Without Getting Scammed

On the date of publication, Faisal Humayun did not hold (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.