Heavily shorted meme stocks have become a major draw for speculators in the stock market. These stocks are characterized by their high volatility, popularity, and short interest by investors. The rise of these meme stocks has been fueled by the power of social media and its ability to influence the masses.
These heavily shorted meme stocks have recently provided plenty for investors to talk about. These stocks, usually low-priced and highly-volatile, have become popular with traders looking to make quick profits. However, the risk associated with these investments is significant.
Last year, when the broader risk sentiment of the market flipped due to rapid rate increases, these meme stocks experienced large sell-offs. Starting in early 2021, a collective of retail traders on social media started buying heavily shorted stocks, leading to an influx of short squeezes that caused tremendous losses for short sellers. Despite the short interest in these stocks declining from its all-time high following the stunning occurrence, these stocks are still heavily-shorted, far above average.
A short squeeze occurs when a stock rises, pushing short-sellers to buy back their shares to contain their losses. This buying can further fuel an equity rally, as short-sellers are “squeezed.”
This article will explore why these stocks are so highly shorted and what risks investors should consider before investing.
Marathon Digital (MARA)
Marathon Digital (NASDAQ:MARA) is a digital asset technology company that specializes in mining cryptocurrencies. The company has been at the forefront of the blockchain ecosystem, providing innovative solutions to help businesses and individuals gain access to the world of digital assets.
Marathon Digital Holdings has developed an extensive suite of products and services designed to make it easier for businesses and individuals to manage their digital assets.
Additionally, Marathon Digital Holdings provides consulting services to help companies navigate the complex blockchain ecosystem.
The crypto markets have had a major impact on MARA’s performance, leading to subdued investor sentiment throughout 2022. Nonetheless, 2023 has been an extremely successful year for the stock. Shares of the crypto miner have risen approximately 75% since the start of the eyar. Simultaneously, the stock’s short interest has also increased to 43.40% as of this writing.
With the crypto winter not yet over, it makes sense that investors are lining up and placing their bets regarding the stock’s downfall. However, MARA stock is proving to be very resilient in the current climate.
Specifically, the crypto miner produced 687 bitcoin (BTC-USD) in Jan. 2023, representing an increase of 45% from December 2022’s 475 Bitcoin output. At the same time, to cover operational expenses, MARA sold 1,500 bitcoin in January.
It is rare for Marathon to sell bitcoin from its holdings. However, this move does appear to make sense. The crypto miner took advantage of the surge in bitcoin prices since the start of the year to fund its operations and help ramp up production.
AMC Entertainment (AMC)
AMC Entertainment (NYSE:AMC), the movie theater company, is one of the most popular meme stocks. Market participants have been enthusiastic about growth stocks in general, but meme traders had their eyes on a specific selection of companies. Clearly, AMC stock has been among the few that caught their attention.
There is speculation that another short squeeze is around the corner, with borrowing costs rising and a small pullback in the stock price.
Borrowing fees are an important factor to consider when shorting a stock. When you short a stock, you borrow the shares from your broker and then sell them. The borrower pays a fee to the lender for the privilege of borrowing their shares. This fee is known as the borrowing fee, which can vary depending on the type of stock borrowed and how long it is being borrowed.
AMC’s fees have skyrocketed since the start of the year, starting at 20% and reaching unsustainable heights of 400%.
Meanwhile, short interest is also on the rise. Between August 2022 and February 2023, the percentage of AMC stock float shorted has risen from 17.29% to 22.9%.
From a fundamentals perspective, there is little to praise here. AMC’s stock witnessed a huge rally due to the attention it received from meme traders. The easing of pandemic restrictions meant that moviegoers would likely return to theatres, so investors figured this would benefit the company’s prospects.
Though the pandemic has been weathered, streaming remains as robust as ever, and the effect on movie theatres is expected to be long-term. This implies a steady decline in theatre foot traffic over time.
However, these headwinds do not mean much in the world of meme stocks. When crunching the data for heavily shorted meme stocks, AMC stands apart from its peers.
Palantir Technologies (PLTR)
Palantir (NYSE:PLTR) is a global technology company that provides data analysis and intelligence solutions. It was founded in 2004 by Peter Thiel, Joe Lonsdale, Alex Karp, and Stephen Cohen. Palantir is one of the world’s leading data analysis and intelligence companies.
The company provides its customers with various services such as predictive analytics, data integration, cyber security, artificial intelligence, and enterprise software development.
Palantir also works with government agencies worldwide to help them better understand their data and make informed decisions. With its cutting-edge technology and innovative solutions, Palantir is quickly becoming an industry leader in data analysis and intelligence.
Palantir’s entrance into the 2020 IPO market was a hit and attracted many investors. It’s trading publicly further increased its visibility and solidified its place in the financial world. However, as the stock market crumbled in 2022, so did Palantir, alongside other growth stocks.
Palantir is one of the strongest companies in the IT sector due to its advanced technological capabilities. This is why many US government organizations have trusted Palantir with their operational requirements. A criticism often leveled against the data analytics company is that it lacks commercial clients. However, Palantir has been making some decent progress on this front. The company generated US commercial revenue growth of 53% versus last year in fiscal Q3.
The most recent contract wins for Palantir include a $50 million, five-year expansion of its work with Japanese insurance firm Sompo Holdings, a collaboration with drug distributor Cardinal Health (NYSE:CAH), and a strategic partnership with security company Cloudflare (NYSE:NET).
On the publication date, Faizan Farooque did not hold (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.