The next GameStop? Here are the 10 most heavily shorted US stocks

Betting on these 10 shorted stocks could mean big rewards but it’s important to know the risks.

When Elon Musk tweeted support for a short squeeze on GameStop stock, its share price went through the roof. The gaming retailer’s shares were up at US$347.65 (around £354) a share by the close of play on Thursday in the US after starting the year at just US$17 (about £12) – a 20-fold increase.

The Tesla CEO didn’t start the trend: participants in Reddit’s WallStreetBets message board had been hyping it to raise its price and squeeze hedge funds that had shorted, or bet against, the company. By Wednesday the boards were already buzzing about other shorted stocks they might chase, and several were rising – although the board itself has been closed by Reddit.

The moves made GameStop, which is among the S&P 1500 index’s most shorted stocks, one of the hottest names out there. It also led to a lot of buzz around other shorted stocks, including AMC Entertainment, with individual investors looking for the next big stock rocket ride. Investors not experienced in this game should be aware that the risks are as high as the potential rewards.

In shorting a stock, investors borrow shares they believe will decline in value and sell those shares. These investors hope this stock will continue to fall in value so they can buy back the shares at a lower price and pay off the loan, pocketing the difference.

Taking a contrary position to shorting can lead to big gains as well. Buying moves stock prices up, which leads those with short positions to close positions by buying even more. Some of the most heavily shorted stocks on the S&P 1500 index have in fact climbed this year.

Here are the 10 most heavily shorted stocks in the US, according to S&P Global Market Intelligence, from the Nasdaq and NYSE:

Bed Bath & Beyond (Nasdaq: BBBY)

Shares of BBBY were at $38 in pre-market Friday, having previously gone up more than 24% on Wednesday to US$46.05 after beginning the year at US$18.03.

Macy’s (NYSE: M)

Macy’s department stores struggled during the COVID-19 pandemic, with its flagship store in heavily affected New York, but the retailer is already making a comeback this year. Shares of Macy’s closed on Thursday at $15.57, and were trading slightly higher in pre-market Friday. The stock opened 2021 at US$11.22 per share.

Ligand Pharmaceuticals (Nasdaq: LGND)

Biopharmaceutical company Ligand Pharmaceuticals is yet another shorted stock that is currently on the rise. Shares of LGND were up 17.58% on Thursday, closing at $191.59. The stock began 2021 at US$101.07.

B&G Foods (NYSE: BGS)

Although B&G is on the list of most shorted stocks, 2021 has been a good year so far for the processed foods company, founded in 1889. Shares of B&G opened the year at US$27.70, but finished trading at $37.51 on Thursday.

International Flavors & Fragrances (NYSE: IFF)

As its name implies, International Flavors & Fragrances makes flavours, fragrances and additives for the cosmetics industry. Shares of IFF have seen some volatility in 2021, opening the year at US$105.08 and hitting a sweet-smelling high of US$125.98 on 12 January. At the end of Thursday’s trading, shares were up 3.68% to $115.02.

The GEO Group (NYSE: GEO)

The GEO Group, a property investment trust (REIT) that invests in private prisons and mental health facilities in North America, Australia, South Africa and the UK, saw its stock close at $8.62 on Thursday, having opened 2021 at US$8.75.

Tanger Factory Outlet Centers (NYSE: SKT)

Tanger Factory Outlet owns 32 shopping centres. It might also be a shorted stock to watch. Shares of SKT were down 9.35% on Thursday, finishing the day at $16.19, but were trading above $17 in Friday’s pre-market. The stock began 2021 at US$9.82 per share.

iRobot (Nasdaq: IRBT)

Shares of iRobot, maker of robot vacuum brand Roomba, which are among the most heavily shorted, were down 24.3% on Thursday, at $122, but were trading at $128 in Friday pre-trading. It began the year at US$79.38.

Children’s Place (Nasdaq: PLCE)

The children’s clothing and accessories retailer struggled in 2020, yet another victim of the retail crunch seen in the wake of the COVID-19 pandemic. It’s heavily shorted, but the stock seems to be rebounding in 2021. Shares of PLCE, founder 1969, were down 2.28% at $71.03 on Thursday, with the stock starting the year at US$48.94.

Macerich (NYSE: MAC)

Macerich is the second property investment trust (REIT) on the list of most heavily shorted stocks. This REIT invests in shopping centres. Shares of MAC have rebounded in 2021 after getting slammed by the pandemic. In early April of 2020, shares hit a low of US$5.02, but finished trading on Thursday at $19.01, and were up to $19.74 in pre-market trading on Friday.

What are the risks of short squeezing stocks?

Before you chase these stocks, take a look at GameStop’s wild ride.

Internet chatter, such as the Reddit group, and Musk’s tweet sent shares of GameStop up by more than 300%. In an effort to minimise their losses, short-sellers were forced to sell off their shares at a loss. Short-sellers were hoping these stocks will decline in value. When stocks keep rising, they have to move quickly to stem their growing losses.

Stocks can be heavily influenced by headlines, certainly something the people posting on Reddit were counting on. When shares of GameStop went through the roof, many individual investors certainly profited. But at this point, the open question is how long these prices can be sustained. (Another stock caught in this frenzy is AMC, which rose almost 10 fold from around $2 at the start of the year).

That’s true of any stock driven upward by trading action rather than by fundamental business results. Such stocks are likely to be volatile. Share prices may increase for a while, but they may also dive sharply and suddenly. Proceed with caution, and be prepared to keep a close watch on any position you take.