I know what you’re thinking; is Workhorse [$WKHS] the next GameStop? With short sellers getting squeezed, shares could go berserk here soon. It’s not the only prospect in the wallstreetbets thread, as other heavily shorted stocks such as Virgin Galactic [$SPCE] and Beyond Meat [$BYND] could catch that colossal bid.
Here’s the skinny on short squeezes; an investor who sells stock short has borrowed shares of a particular company to sell on a bet that the investor can buy the shares later at a lower price to return the borrowed shares. The short seller’s gross profit is the difference between the price shares were sold at and the price shares were purchased later.
However, if the stock rises instead of falls, the party that lent the shares to sell may require the investor to cover part of the bet by buying some shares and returning them. If the shares continue to rise in price, others who sold the stock short are forced to pay higher prices to return the shares, a process that might drive prices even higher. When the stock surges because short sellers are buying the stock to cover their bets, it is seen as a short squeeze- a handy visual aid would be the GameStop daily chart [$GME].
Oftentimes there’s an impetus that lights the fuse for a short squeeze, but investors don’t usually know how long the fuse is or how big the short-squeeze run-up will be. GameStop is up a good 125%in the past week. What sparked the squeeze seems to be a stake taken by Chewy [$CHWY] co-founder Ryan Cohen’s RC Ventures a couple of weeks back.
GameStop’s crazy move is alarming bears everywhere. Workhorse, Galactic, and Beyond Meat have all added more than 30% inside a week. What’s more, for those companies, over 30% of their shares available for trading are sold short. That’s a lot. The average stock in the Dow Jones has less than 2% of total shares available for trading sold short.
For Workhorse, the catalyst appears to be comments from President Biden. He wants federal vehicles to be all-electric. Workhorse has already bid to replace the USPS white, right-hand drive, delivery vans with electric models. The contract decision has been delayed several times by the pandy. Workhorse is the only bidder with an all-electric option.
The potential for electric commercial vehicles at the USPS and elsewhere has been in the market for a while. Tuesday’s comment from Biden is positive, but the new thing seems to be yugely out of control short squeezes. Tread lightly.