Get Ready: 3 High Short Interest Stocks Poised for a Melt-Up

July 09, 2024 at 07:15 AM EDT

Rear view of a young man holding his smartphone while investing and checking the rise of the stock market

The market’s attention is now shifting from the hype surrounding artificial intelligence-related stocks like NVIDIA Co. (NASDAQ: NVDA) and shortly in so-called ‘meme stocks’ like GameStop Corp. (NYSE: GME) to the fact that the Federal Reserve (the Fed) is now promising interest rate cuts over the S&P 500 and its recent all-time highs.

According to the CME’s FedWatch tool, there is now an over 60% probability that the Fed will start cutting interest rates as soon as September of this year. While lowering interest rates is bullish for stocks overall, not every sector and company is made equal; some will be better positioned to rally above all others. Fundamentally, companies on the smaller end, with a decent amount of debt in their balance sheets, could benefit the most from lower rates.

Fitting this list, alongside other—broader—fundamental trends developing in the market, are stocks like SoFi Technologies Inc. (NASDAQ: SOFI), CAVA Group Inc. (NYSE: CAVA), and even First Solar Inc. (NASDAQ: FSLR). Investors can break down the reasoning behind a potential watchlist addition by keeping the technical and fundamentals in mind when considering these companies.

SoFi Stock Prospects Rise with Real Estate's Upcycle

Starting with the national building permits reading, which are now down 7% on the year and roughly 3.5% on the month, sentiment in the real estate market prospects is lower than ever since COVID-19. While that is a bearish situation today, it opens up a path for investors to catch the eventual upswing that the next step in the cycle may bring.

Considering that the Fed is now poised to cut interest rates in September, and mortgage rates are tied to national rates, cheaper mortgages may spark new housing demand, and SoFi comes into play. Now that U.S. listings are rising, stocks like Zillow Group Inc. (NASDAQ: Z) have already rallied as the first step in the value chain.

The next step after closing down new listings or after building permits start rising is financing the newly built homes and the freshly closed listings. Because of this upcycle, Wall Street analysts forecast up to 212% earnings per share (EPS) growth in the next 12 months.

Backed by these growth prospects, analysts at Deutsche Bank felt comfortable slapping an $11 a share price target on SoFi stock, daring it to rally by as much as 70% from where it trades today.

Because SoFi stock’s short interest is now 18.4% of the outstanding shares, it is considered high enough to initiate a short squeeze. This happens when short sellers suffer a deep loss from a rising stock. Short sellers need to buy back stock to cut their losses (close positions), creating additional buying pressure to fuel a further rally.

Why CAVA's Growth Spells Trouble for Short Sellers

Cava stock carries a short interest as high as 10.6% of the whole float, which acts in the same way as SoFi’s to create a potential short squeeze if the stock goes on a sudden tear. Now, investors must dig into the company's fundamentals to pinpoint how the stock might get there.

Starting with financial performance, the first quarter 2024 earnings results, investors have a few drivers to accredit the potential new rally. Revenue grew 30.3% over the year, which the retail sector is proud of. While that is in the rear-view mirror, here’s how management expects to keep that growth rate going.

Management provided its 2024 guidance for investors and analysts to lean on, including up to 50 to 54 new restaurant openings, expected to deliver 4.5% to 6.5% restaurant-level revenue growth. Economists call this achieving economies of scale, which is the foundation for higher profit margins ahead.

This is why analysts now forecast up to 35.3% EPS growth in Cava stock's next 12 months and why those at the Vanguard Group decided to bring their net investment up to $346.3 million as of May 2024, a bullish bet on Cava’s future.

Oil Bulls Should Watch First Solar Stock

Why would a solar energy company like First Solar be tied to a bullish trend in oil prices? The same reason why shares of Tesla Inc. (NASDAQ: TSLA) rally every time oil goes higher is that it becomes a more attractive energy source, a cheaper one.

If and when the Fed cuts interest rates, global demand for products, commodities, and machinery will rely on oil to be produced. So, the same trend helping other stocks in this list will indirectly also affect the biggest driver in First Solar stock, and considering that its short interest is now 5.5% of the float, it can translate into a bigger-than-expected rally ahead.

Knowing this, investors shouldn’t be surprised to see Wall Street analysts forecast up to 55.1% EPS growth for the company this year, backing price targets of $325 set by Oppenheimer. To prove these analyst valuations right, First Solar stock must rally 46.3% from where it trades today.

It is no wonder that those at the Vanguard Group (First Solar’s largest shareholder) boosted their stakes in the company by 0.9% as of May 2024, bringing the asset manager’s net investment up to $2.1 billion today.