As consumer spending has (and continues to) cool, many retail stocks have become heavily sold short.
In many cases, these large wagers by the short-seller community (considered to be part of the “smart money”) appear to be shrewd bets.
However, in situations where the short side of the trade has become very crowded (i.e. the percentage of outstanding float that has been sold short has climbed to 15%, 20%, or even higher), there may be an opportunity for speculators on the long side of the trade.
“Short squeeze mania” may not be as strong as it was in 2021 or 2022, but it may take only a modicum of positive surprises to cause heavily shorted stocks in this sector to spike in price.
The reporting of better-than-expected quarterly results, a financing move that lessens the risk of bankruptcy/default, or any other action that signals “less bad” fundamentals could spark rallies among several of these stocks.
In turn, these rallies could leave the short side scrambling, forced to cover positions, causing these stocks to rise even higher.
That’s the story here with these seven heavily-shorted retail stocks. “Squeeze potential” runs high with each of them.
Big 5 Sporting Goods (BGFV)
The odd mix of high fear/uncertainty and high consumer spending produced a massive boom for Big 5 Sporting Goods (NASDAQ:BGFV) during the pandemic era.
As a result, shares in the firearms and sporting goods retailer went from $2 to over $40 per share between mid-2020 and late-2021.
However, with the emergence of economic challenges like high inflation affecting consumer spending, revenue and earnings have declined. This, in turn, resulted in a big decline in the BGFV stock price, which today changes hands for around $8 per share.
But while the stock is heavily-shorted (12.6% of float sold short, according to Fintel), on the view Big 5’s fundamentals keep worsening from here, there may be squeeze potential here with BGFV.
If results improve (as guidance suggests) next quarter, increasing the changes Big 5 maintains its 12.4% dividend, shares could squeeze back toward higher prices.
Big Lots (BIG)
At first glance, Big Lots (NYSE:BIG) seems like one of the heavily shorted retail stocks where you don’t want to go contrarian.
Several quarters of high operating losses, coupled with the suspension of its dividend, have already caused shares in this discount retailer to plummet by more than 90% since mid-2021.
Yet while BIG stock may look like the next retailer at risk of becoming the next Bed Bath & Beyond (OTCMKTS:BBBYQ), that sort of “game over” moment may not necessarily arrive.
Along with eliminating the dividend, Big Lots has made some other moves in recent months to bolster liquidity.
For instance, a $318 million sale/leaseback agreement inked in July. Bankruptcy risk is still heavily baked into BIG’s share price. Further developments indicating that it will avoid Chapter 11 could fuel a squeeze frenzy for this stock, which has had nearly 23% of its outstanding float sold short.
Dillard’s (DDS)
Dillard’s (NYSE:DDS) was no GameStop (NYSE:GME), yet it was one of the retailer stock boosted by 2021’s “meme stock mania.”
However, unlike GME, fueled fully by speculative frenzy, with DDS, what started as a short-squeeze morphed into a continued rally powered by improving fundamentals.
DDS stock stayed resilient through 2022 and into 2023, but more recently, shares have again come under pressure. The economic slowdown suggests tougher times ahead for department store chains like this one.
With this, it makes sense that short interest in DDS has climbed again, to 16.62% of outstanding float.
However, much like the last time, short-sellers could end up taking big losses. Recently, profitability has declined only moderately.
These “less bad” results, combined with Dillards’ move to continue buying back stock, could be enough to squeeze DDS (at around $340 per share today) back to its 52-week high ($417.86 per share).
Joann (JOAN)
Back in February, I argued that Joann (NASDAQ:JOAN) was one of the top retail stocks to avoid. A worsening fiscal performance and a suspended dividend pointed to even lower prices ahead for the fabric store chain operator.
If you sold JOAN stock at this time, you avoided significant further losses. Shares during this time frame have dipped from $4.40 to just over $1 per share. Yet while the situation has deteriorated further and bankruptcy fears run high, a squeeze may be possible.
JOAN’s outstanding float is 23%. Any indication that the company can avoid bankruptcy, may be enough to spark a big rip higher for Joann shares.
Something like announcing that the retailer has found a new permanent CEO, could cause a spike as well for the stock. Tread carefully here, but consider adding JOAN to your short-squeeze watchlist.
Lovesac (LOVE)
Lovesac (NASDAQ:LOVE) is not just one of the short-squeeze retail stocks. It is also one of the most heavily shorted stocks overall right now.
It makes sense in today’s climate that nearly 30% of this home furnishing stock’s outstanding float has been sold short.
However, the short-side’s big bet against LOVE stock could come up snake eyes. As InvestorPlace’s Rich Duprey recently put it, “Lovesac is not a broken business.”
Sell-side forecasts still call for the company to remain profitable this fiscal year. Next fiscal year (ending January 2025), earnings could come in at nearly $3 per share.
LOVE today trades for just 7.5 times this forecast. Solid results in the coming quarters could ease the uncertainty surrounding future performance.
This in turn may cause a short-squeeze, as the longs bid up LOVE to a higher forward valuation, leaving the shorts forced to close out positions at higher prices.
The Children’s Place (PLCE)
The Children’s Place (NASDAQ:PLCE) is another of the retail stocks with very high short interest. The percentage of float sold short with this childrens’ apparel retailer comes currently at 21.9%. So, what besides a crowded short-side make this a “squeeze contender?”
Admittedly, this company reported horrendous numbers for the preceding quarter. Losses per share came in at $2.82, versus a loss of $1.01 per share reported in the prior year’s quarter.
However, the company (which is transforming into mainly an e-commerce retailer) is guiding for a return to profitability during this quarter and the next.
According to analysts, earnings could more than quadruple next fiscal year. If the potential for materially-improved results becomes a near-certainty, this $27 per share stock could make a big leap back toward past loftier price levels (at few years ago, PLCE stock traded for over $100 per share).
Shoe Carnival (SCVL)
Short interest for Shoe Carnival (NASDAQ:SCVL) stock right now is at 15.8%.
Short-sellers likely wager that the shoe retailer, which experienced a big jump in earnings during the pandemic, returns to pre-pandemic levels of profitability.
Yet with SCVL stock trading for 6.6 times forward earnings, it’s possible that the market has already more-than-priced-in the potential for weaker results moving forward.
Even if earnings do keep declining from here, if they remain above the level of earnings Shoe Carnival reported in the fiscal years preceding the virus, this may be enough to fuel a re-rating.
Given the high level of short interest, this re-rating could be fairly substantial. That’s not to say SCVL will re-hit its high water mark ($43.31 per share). However, re-hitting $30 per share may be within reach. Not too shabby, given the stock trades in the low-$20s per share today.
On the date of publication, Thomas Niel 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.