Shorting the Shorts: 3 Stocks Primed for an Epic Squeeze
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Danish researchers published a report on the arXiv.org open-access archive for scholarly articles in February about the Jan. 2021 short squeeze of video game retailer GameStop (NYSE:GME). The researchers found that the subreddit community WallStreetBets 's(WSB) desire to find and invest in stocks primed for short squeeze had a role in GME’s short squeeze from more than three years ago.
“We estimated that the size of the total position of WSB users amounted to at least 1% of GME market capitalization, demonstrating a tangible engagement of the WSB community in the stock market” the report’s conclusion stated.
There is no question that the WSB community affected GameStop’s massive short squeeze, which saw GME stock go from less than $5 to over $80 in three weeks. While WSB's influence isn’t nearly as strong as it once was, Reddit is set to go public in mere days, a sign that it’s become part of the investment community’s inner circle.
Maybe there won’t be another one like GME’s, but just in case, here are three stocks primed for a short squeeze.
MGP Ingredients (MGPI)
MGP Ingredients (NASDAQ:MGPI) used to produce distilled spirits for other brands. In April 2021, it diversified into its own brands when it acquired Luxco, a maker of bourbon brands such as Rebel Yell, for $475 million. The acquisition was part of the company’s growth stategy focused on producing higher-value products.
In 2023, its Luxco division acquired Penelope Bourbon for $105 million plus potential payouts of $111 million based on meeting specific performance targets.
Penelope was already being distilled at MGP’s Lawrenceburg, Indiana distillery, so the acquisition makes sense. Penelope sells 50,000 cases annually, growing by more than 160% year-over-year.
Not everyone believes MGP’s premiumization strategy is a good idea. As of Feb. 15, it had 3.28 million shares short, accounting for 23.73% of its float. The company reported full-year results on Feb. 22.
The move into higher-value products increased its gross margin by 610 basis points in 2023 to 42.5%. The company's adjusted operating income increased 21% in 2023 to $180.3 million, a 21.6% operating margin, 260 basis points higher than a year ago.
MGPI stock is primed for a short squeeze.
Encore Wire (WIRE)
Encore Wire (NYSE:WIRE) is a Texas-based manufacturer of copper and aluminum building wire used in residential, commercial, and industrial buildings. The company started in 1989, going public three years later, in July 1992, around $3 a share.
I first recommended Encore in December 2022, along with six other small-cap stocks. My sentiment was the same then, as it is now, that it would continue to capture market share. Encore's shares are up 59% in the 15 months since, 29% better than the S&P 500.
Encore had a down year this past year due to a 17.8% decrease in the average selling price of copper wire in 2023, partly offset by a 6.7% increase in pounds of copper shipped. As a result of the nearly 15% decline in revenue in 2023 to $2.57 billion, Encore's gross profit margin fell 11.4 percentage points to 25.5% from 36.9% a year earlier.
Prices are a part of the business it can’t control. However, It can control its balance sheet. As of Dec. 31, Encore had no outstanding long-term debt and $560.6 million in cash and cash equivalents on its balance sheet. That was down from 2022 but still represented a high 16% of its market capitalization.
As of Feb. 15, it had 3.36 million shares short, accounting for 22.87% of its float.
Celsius Holdings (CELH)
Celsius Holdings (NASDAQ:CELH) is having a down year by its standards, up 61% in 2024. Over the past five years, it’s gained a whopping 5,387%. It is the modern version of Monster Beverage (NASDAQ:MNST).
I’m unsure why investors would short Celsius, given that PepsiCo (NASDAQ:PEP) is in its corner. In Aug. 2022, PepsiCo invested $550 million in Celsius convertible preferred shares, which pay a 5% annual dividend and are convertible into 8.5% of the company’s common stock at $75 a share, solidifying its role as the U.S. distributor.
On Jan. 22, Celsius announced expansion into Canada through Pepsi—I’ve seen it prominently placed in my local grocery store—and the UK and Ireland through Suntory Beverage & Food.
In 2023, Celsius’s revenues were $1.32 billion, 102% higher than a year earlier. North American revenues were up 105%, while international revenues saw a 52% boost. Celsius's gross margin also increased 660 basis points YOY to 48.0%.
Its adjusted EBITDA jumped 316% to $295.6 million, an EBITDA margin of 22.4%. In comparison, Monster Beverage’s EBITDA margin in 2023 was 28.5%, 610 basis points higher. However, Monster’s margin is barely growing, while Celsius has plenty of room to grow its margin over the next several years.
Celsius has 36.31 million shares sold short, accounting for 22.81% of its float. Of the three names covered here, CELH would be my least likely to short.
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