When stock markets ended the first quarter of this year with strong gains, speculators bought the most short-sold stocks. They bet that despite the deteriorating business conditions, the stock would overcome unfavorable valuations.
Although bears hold a high short float against the stock, traders are betting on a short squeeze. The stock price rises rapidly when bearish investors buy back stock to avoid further losses. However, buy-and-hold investors should avoid the most short-sold stocks at all costs.
Market sentiment may reverse in an instant. The buying euphoria in the three stocks discussed below could fall again without warning.
Chewy (NASDAQ:CHWY) is a consumer cyclical online retailer of pet food. In the fourth quarter, it posted non-GAAP earnings per share of just 16 cents.
Its revenue grew by 13.4% Y/Y to $2.71 billion. Chewy is among the most short-sold stocks. Markets are skeptical that the company will grow its net sales beyond its 10% to 12% forecast for the year.
Chewy expects a slight decline in EBITDA guidance for this year. Chief Financial Officer Mario Marte said that it is prioritizing cost efficiency over earnings. To better fit more of an order in a single package, it needs to develop its operating logistics.
Shareholders should brace for a correction when the stock trades at a price-to-earnings of over 300 times. Chewy’s competitors may also expand their gross margin by increasing profits per shipment. The company may need to increase its sales, general, and administration costs to support margins. This is already pressuring Chewy’s EBITDA this year.
Carvana (NYSE:CVNA) stock has a short percentage of float of 73.9%, according to Stockrover. On March 22, it announced an exchange offer to cut its interest costs by around $100 million. The offer will cut its unsecured bond debt by $1.3 billion.
Carvana, which speculators thought would disrupt the used automobile market during the pandemic, has troubling financing issues. Bondholders must trade in their debt, which yields around 30% with new debt.
The company is offering only between 63 cents and 81 cents on every dollar. Unfortunately, the business will probably weaken further. This increases the risk of Carvana defaulting on its bonds in the future.
In the fourth quarter, Carvana posted a 23% decline in retail unit sales to 86,977. Its net loss margin worsened to -50.8%, compared to -4.8% last year. The firm lost $7.61 a share. The company expects retail units sold in Q1 2023 to fall again. It will need to work down its large inventory, incurring more losses.
Upstart (NASDAQ:UPST) is an artificial intelligence lending platform. UPST stock once traded at over $300 in 2021, well before the hype of AI. This is among the most short-sold stocks at a 41.0% short percent of the stock’s float.
The company, which posted a 52% decrease in revenue to $147 million in Q4 of 2022, runs a broken business. It lost $58.5 million when its fee revenue fell. The company posted revenue of only $156 million. In addition, the loan business is worsening.
The volume of loan transactions across its platform fell by 69% to 154,000 loans. Automotive loans are stagnating. People are canceling plans to buy vehicles amid high inflation eroding their disposable incomes.
The company paused its small business loan. CFO Sanjay Datta said it will get back to those customers at the right time. The unknown timeline should trouble investors.
Shareholders should brace for an erosion in Upstart’s unrestricted cash position. The company needs to deploy cash to reduce its net debt. After it wasted around $25 million in buying back stock, expect Upstart to buy more shares.
On the date of publication, Chris Lau did not have (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.