3 Stocks to Watch That Can Burn Short Sellers Big in 2023

2022 was the worst year for most investors.of Dow Jones Industrial Average, S&P 500When NASDAQ Compositeall plunged into a bear market, producing the worst returns since 2008.

On the one hand, it was a perfect scenario for short sellers to profit. A short seller is an investor who makes a profit when the price of a security falls. Short selling can make quite a profit, but it’s worth pointing out that profits are limited to 100% he he (stocks cannot go below $0) but losses are theoretically unlimited .

Short sellers usually tend to target companies with obvious flaws or red flags. This may include operational problems, managerial errors, indebted balance sheets, adverse legal judgments, or even valuation concerns. In many cases, stocks that are heavily shorted have serious problems in one or more of the aforementioned categories and deserve skepticism. However, this is not always the case.

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As of last week, 85 publicly traded companies with a market cap of over $300 million had shorted at least 20% of their float (the number of shares available for trading). Three of these hotly shorted stocks stand out for their ability to sell large numbers of short stocks in 2023.

Upstart Holdings: Short 38.3% of float

Cloud-based lending platform is the first big short-selling stock that could lead to a pessimist’s short-squeeze Upstart Holdings (UPST 7.40%).

The skepticism surrounding Upstart’s operating model is easy to understand. The Federal Reserve is grappling with historically high inflation and has had to raise interest rates at the fastest pace in 40 years. Rising interest rates quickly make borrowing less attractive for both consumers and businesses. This isn’t exactly good news for companies operating lending platforms. Also, this weakness is seen in both revenue and earnings results.

But given the clear competitive advantage Upstart offers, it could be argued that the pessimism directed at Upstart is already built into its valuation.

While the lending industry has relied on the same slow and costly loan underwriting process for decades, Upstart’s platform uses artificial intelligence (AI) and machine learning to speed up and improve loan underwriting. increase. In Q3 2022, a record 75% of loans made through its platform were approved and fully automated. This saves time and money for the company’s nearly 70 bank and credit union partners.

What’s really remarkable about Upstart is its ability to expand its range of borrowers without exacerbating credit risk. More specifically, even though Upstart-processed loans have less average credit damage than traditional vetted loans, the delinquency rates between the two are similar. The implication here, and the reason nearly 70 lending institutions have partnered with his Upstart, is that Upstart can bring new customers to banks and credit unions without hurting their creditworthiness.

Additionally, Upstart has just entered auto and small business loans, which are much larger loan origination markets than personal loans. The latter has been Upstart’s focus for the past few years. If the country’s central bank steps away from gas and pauses rate hikes in the first half or first quarter of 2023, Upstart could catch pessimists off guard and potentially fuel a short-squeeze in a notable surge in loan processing demand. There is a possibility to confirm the recovery.

Petco Health and Wellness: Short 20.7% of float

The second notable stock with all the tools and intangibles needed to burn shortsellers in the New Year is a pet-focused retailer Petco Health and Wellness (weft thread 2.30%).

As of December 30, 2022, more than 30 million Petco shares were held short, up significantly from the end of November. The skepticism appears to be the result of higher-than-expected integration costs from Petco’s acquisition of animal health business Thrive. It could also be argued that short-sellers expect an overall bearish for retailers in 2023 given the many warning signs of a possible US recession.

Short sellers, on the other hand, may be ringing the wrong tree at Petco Health and Wellness.

The pet industry is arguably one of the most recession-proof industries on the planet. It’s been more than a quarter century since U.S. pet spending declined year-over-year, according to data from the American Pet Products Association (APPA). What’s more, the latest APPA survey notes that 70% of his households in the US own pets. This is the highest number since APPA began his survey in 1988.

But what will really surprise short-sellers in 2023 is Petco’s investment and business transformation. As an example, the company has significantly strengthened its online presence in the wake of the pandemic. Digital sales increased by 10% in Petco’s third quarter (ending October 29, 2022) and by 42% compared to Q3 2020. Convenience is key for shoppers, and Petco management got that message.

Petco also actively promotes subscription services, including pet grooming, access to on-site veterinary care, and discounts on a variety of products throughout its stores. In conjunction with its pet insurance offering, Petco has made a number of moves designed to increase operating margins, encourage repeat visits and improve customer loyalty.

Petco Health and Wellness is unlikely to be affected by a US recession, so it may be poised to take a hit on short sales.

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Novavax: Short 38.9% of float

Biotech stocks are the third and final stocks to watch short-sellers in big stride in 2023 Novavax (NVAX 3.20%)In terms of short-selling ratio, Novavax has the highest of the three stocks under discussion (almost 39%).

Novavax’s bear case is primarily related to the company’s COVID-19 vaccine mistake. Novavax has repeatedly delayed emergency use approval applications in many developed markets. It also endured a production ramp-up problem that could devour the proverbial fruit (that is, the first series of vaccines) readily available to competing vaccine manufacturers.on the other hand Moderna Novavax is expected to hit $2 billion in sales in 2022, with $19 billion in pre-purchase contracts signed.

However, Novavax wouldn’t be on this list without a catalyst that could place short sellers in its stead.

The first thing to note about Novavax is that its COVID-19 vaccine is differentiated. While his two most popular COVID-19 vaccines are messenger RNA-based, Novavax’s NVX-CoV2373 is protein-based and uses older technology to develop ways to recognize and fight infection. Teach your immune system. This differentiation, combined with high initial vaccine efficacy (90.4%) in trials in the US/Mexico in 2021, will make Novavax competitive as the COVID-19 vaccine moves from pre-purchase agreements to the private market this year. It should help you raise.

Arguably more interesting from an investment perspective is the future potential of the company’s vaccine development platform. Apart from the development of strain-specific COVID-19 vaccines, Novavax’s pipeline shows promise in vaccines for influenza, respiratory syncytial virus, and combination therapy (influenza + COVID-19).

Finally, Novavax is well capitalized. Wall Street wasn’t all that excited about the company’s convertible bond and stock issuance in December, which brought in about $250 million in revenue, but before this raise, he said at the end of September, It had $1.28 billion in cash and cash equivalents. Novavax has sufficient capital to conduct clinical trials and continue to innovate.