3 Stocks With High Short Interest That Could Backfire On Short Sellers

“Why won’t my stock go up?” Many investors find themselves puzzled by this question even after carefully evaluating the company’s earnings reports, guidance, and analyst ratings, which all seem positive. However, one crucial data point often overlooked is short interest. 

In a functioning market, there are buyers and sellers. Just as buyers can become “irrationally exuberant,” a term coined by former Federal Reserve chair Alan Greenspan, they can also become irrationally negative about a stock’s prospects. This sentiment often reflects in the stock’s short interest ratio—the percentage of shares sold short. 

For long-term investors, high short interest can feel like pushing a boulder uphill like Sisyphus; any gains made can be quickly erased by short sellers. But sometimes, the scenario flips—if a stock’s price suddenly rises, short sellers must cover their positions at higher prices, leading to a short squeeze. 

One famous instance of a short squeeze was GameStop (NYSE:GME) in 2021. Tesla (NASDAQ:TSLA) has also experienced notable short squeezes. While a short squeeze is difficult to predict and shouldn’t be the sole reason for investing in a stock, it’s useful to be aware of it. Here are three stocks currently displaying high short interest, where short sellers might face challenges. 

SoFi Technologies: Can They Show Profit Isn’t A Fluke? 

SoFi Technologies (NASDAQ:SOFI) has been a target for heavy short selling almost since it became a public company. As of April 2024, short interest in SOFI is notably high at 18.9%. The skepticism from short sellers largely stems from the company’s exposure to student loans, which they believe could lead to significant credit losses, particularly in a scenario where interest rates remain high, potentially stifling SoFi’s path to profitability. 

Yet, SoFi could be described as a “yeah, but” stock, as it seems to continually counter the doubts of skeptics. The company has shown consistent revenue growth both sequentially and year-over-year. Importantly, it reported a profit in its most recent quarter. 

Despite the entrenched position of short sellers and the broader market sentiment that often pressures stocks like SOFI with a market cap just under $7 billion, another few profitable quarters might be too compelling for investors to overlook. This could trigger a significant price increase if the short sellers are forced to cover their positions. 

Williams-Sonoma: Know Thy Customer Is A Sound Strategy 

Williams-Sonoma (NYSE:WSM) finds itself in the crosshairs of short sellers, a position fueled by rising interest rates, a sluggish housing market, and the anticipated cutback in consumer discretionary spending. These factors have indeed impacted the company to some extent, with both revenue and earnings declining by approximately 10% over the last year. Despite these challenges, WSM stock has surged over 100% during the same period, yet short sellers remain persistent.  

The challenge for those betting against the stock is that Williams-Sonoma’s fundamentals, which were solid from the outset, continue to strengthen. Last quarter, the company reported a robust margin exceeding 20%. Additionally, Williams-Sonoma has raised its dividend and authorized additional share repurchases, signaling confidence in its financial health. 

With several analysts revising their price targets to figures well above the current stock price of around $279, another strong earnings report could provide the necessary momentum for the stock to climb further, potentially squeezing the short sellers. 

Occidental Petroleum: Are You Going To Bet Against Buffett? 

Among the three stocks listed, Occidental Petroleum (NYSE:OXY) has the lowest short interest rate, hovering around 5.5%. While this rate isn’t typically considered high, Occidental Petroleum remains one of the most heavily shorted stocks in the oil and gas sector. Its 5.5% short interest ratio is double that of competitors like Chevron (NYSE:CVX) and ExxonMobil (NYSE:XOM). 

The skeptics of OXY point to its relatively high debt, low margins, and modest production levels as reasons to bet against it. This stance seemed reasonable when oil prices were below $70. Even now, if oil prices fail to reach the anticipated $100 mark, there might be better investment options in the sector. 

In fairness, Warren Buffett sees value in OXY beyond its role in the oil and gas industry. The fact that his hedge fund now holds 25% of the company speaks volumes about Buffett’s confidence in its long-term prospects. If oil prices surge, the shorts could find themselves in a tough spot.