January 28, 2021 6 min read
This story originally appeared on Stock News
Every bull market comes with its own set of anecdotes that capture the spirit and the emotions of that time.
For instance, the dotcom bubble and electronic trading brought an army of day traders to the market who were enraptured by the potential of the Internet and the big price swings of Internet stocks.
And a decade later we saw oil prices climb above $150 a barrel, which led to gas prices above $5 and $6 per gallon.
One of the lasting anecdotes from this current bull market is r/Wallstreetbets subreddit message board and its followers embrace of “meme stocks”. As this community has grown larger, many believe it’s leading to exaggerated volatility in the stocks they follow and get behind. In recent weeks, this has resulted in extraordinary moves in stocks with high levels of short interest.
Related: For GameStop Investors, It’s Game On
Gamestop’s crazy ride
There is no better illustration of this than Gamestop (GME ) which has a short float of 141 percent. Many on Wall Street believed the company was destined to go bankrupt due to video game sales increasingly moving online, and the overall issues with physical retail compared to e-Commerce.
The stock started the year at $19. Today, it reached a high of $380. At this point, the stock has become completely disconnected from fundamentals. On social media, users have banded together to bid up shares and put pressure on the funds that are short GME in size.
These types of short squeezes have happened in the past, but it’s typically Wall Street firms ganging up on each other rather than retail traders – many armed with their stimulus checks – coordinating on social media.
Many of the traders on WallStreetBets are buying out-of-the-money short-term call options. If enough of these options are purchased, it can end up with the investors that are short buying call options to hedge exposure. Usually, this effect isn’t enough to meaningfully move a stock but call-buying volumes have exploded in recent months especially in single-stock equities.
There were also some fundamental improvements in GameStop’s business that have been undermining the bearish consensus on the stock including a string of earnings beats and analyst upgrades. Earnings have surprised to the upside due to increased spending on gaming due to the pandemic and the new console cycle.
Another catalyst was the appointment of Chewy (CHWY) founder to Gamestop’s Board of Directors. He has also taken a 12.9% stake in the company and is focused on helping it transition to e-Commerce.
This combination of factors was behind Gamestop’s gradual rise from its March low of $2.57 to $20 at the end of 2020. Recent gains have been amplified by the high short-interest and retail traders piling into the stock to generate a short-squeeze which has captured the attention of people around the world.
3 potential meme stocks
At this point, no one knows when the short squeeze in GME will end. One lesson of previous stock market bubbles is that these trends last longer than anyone thinks possible.
The bull market in Internet stocks started in earnest in the mid-90s and didn’t stop until 2000. Electric vehicle stocks have been making new, all-time highs since last summer and have continually defied the skeptics.
This short squeeze trend could spill over to other highly shorted stocks. Investors should look for stocks with improving fundamentals, high short floats, and looming catalysts. Three stocks to consider are Bed Bath & Beyond (BBBY), Tilray (TLRY), and Gogo (GOGO).
Bed Bath & Beyond (BBBY)
BBBY fits many of the same parameters as GME. It is a physical retailer that many believed was in secular decline due to the rise of e-commerce and the costs associated with running retail locations, especially during a pandemic.
However, just like GME, it has defied expectations. This was largely due to increased consumer spending on home goods and household upgrades, and the company increasing online sales and adapting to curbside pickup.
The company is also on the other side of a restructuring which involved improving its online sales and distribution channels and shuttering underperforming locations. Thus, same-store sales were already showing signs of increasing.
The near-term picture also looks compelling due to expected online sales growth of over 50%, a strong housing market, and a flush consumer due to looming stimulus payments. BBBY has a short float of 65% which could lead to an exaggerated move higher especially if these market conditions persist.
The POWR Ratings are also bullish on BBBY as it has a Buy rating with an “A” for Trade Grade and a “B” for Industry Rank. Among the Home Improvement & Goods sector, it’s ranked #40 out of 60.
Gogo (GOGO)
GOGO has a short float of 45%. The company offers wifi access to passengers on flights. Like many travel-related stocks, its business has suffered during the pandemic.
Since its IPO in 2014, the stock has been an underperformer as not enough people were using its services on flights for it to be profitable. However, its fortunes took a sharp turn lower with the coronavirus causing revenues to plummet.
Yet, its fortunes are improving as the vaccine means there’s now an endpoint for when life will return to normal and travel will resume. The pandemic also led to an increase in the time people spend online for work and entertainment. This will likely lead to higher use of Gogo’s services on flights.
On a technical basis, the stock consolidated between $8 and $12 from September to January. Now, it seems to be in the early stages of a breakout. Breakouts to new highs from a period of range-bound trading have a higher chance of being successful.
The POWR Ratings are also bullish on GOGO as it has a Buy rating. It has an “A” for Trade Grade and a “B” for Buy & Hold Grade and Peer Grade. Among Air/Defense stocks, it’s ranked #36 out of 71.
Tilray (TLRY)
TLRY has a 42% short float. It is a cultivator, processor, and distributor of medical marijuana. The company has a market cap of $2.5 billion and $200 million in sales. Last year, it had a net income of -$488 million as the company is focused on growth.
Cannabis stocks have outperformed since November as the Biden administration will have a much laxer approach towards regulation. Many states are legalizing the recreational use of cannabis which should also increase demand. This has been a tailwind for all stocks in the sector including TLRY.
TLRY’s short float and exposure to the cannabis industry make it a prime contender for a short squeeze. Cannabis stocks are also dominated by retail trading which is the same group that is piling into stocks with heavy short interest.
TLRY is rated a Buy by the POWR Ratings. It has an “A” for Trade Grade and Industry Rank and a “B” for Peer Grade. Among Medical – Pharmaceutical stocks, it’s ranked #60 out of 239.