3 High Short-Interest Stocks Poised for a Rate Cut Squeeze

August 24, 2024 at 07:00 AM EDT

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When stocks accumulate a significant short interest, it typically creates the risk of a short squeeze. When investors sell a stock short, they have to borrow and sell it to profit from their bearish views. However, closing the position involves buying back the stock. Knowing this, investors can probably guess what happens when short sellers need to close their positions all at once.

The value of the underlying stock might tick a bit higher on good news or developments, triggering short sellers to get out of their positions. This results in massive buying pressure and gets the stock into a virtuous cycle of upward price action. Because the Federal Reserve (the Fed) might start to cut interest rates in the following weeks, a particular group of stocks could see higher prices, and their high short interests could trigger a short squeeze.

This list includes a mix of different industries. Kohl's Co. (NYSE: KSS) is among the retail stocks offering a more affordable alternative to inflation-choked consumers, riding on the tailwinds found in off-price names today. Investors can also get behind Buffett's new bullish oil view through Chesapeake Energy Co. (NASDAQ: CHK). A healthy mix of the real estate sector and technology names drives SoFi Technologies Inc. (NASDAQ: SOFI) into this list, riding on cuts.

Kohl's Affordability Keeps Growth Prospects Strong Despite Inflation

Inflation and the rising cost of living in the United States have been concerns for everyday consumers, leading investors to avoid some of the retail names. These names typically don't fare so well during a volatile consumer environment.

Today, off-price names are starting to outperform not only through price action but also through financial strength.

Kohl's is part of this niche, and Wall Street analysts know how true this is, so they currently forecast up to 24.6% earnings per share (EPS) growth in the next 12 months for Kohl's stock.

Those at Telsey Advisory Group think this company could be worth up to $23 a share, implying investors could be set up for as much as 18.2% from where it trades today.

Despite the bullish evidence mounting for Kohl's, these analysts aren't the only ones willing to change their views.

The stock's short interest is as high as 37.2% of the overall float. Still, now that the stock is tagging onto the momentum found in peers like Target Co. (NYSE: TGT) and TJX Co. (NYSE: TJX) after an explosive earnings rally, Kohl's short-interest is flattening and looking to decline in the coming months at the risk of a short squeeze.

A Buffett-Backed Energy Cycle Could Drive Chesapeake Stock to New Highs

After a nine-day buying spree, Warren Buffett now owns up to 29% of Occidental Petroleum Co. (NYSE: OXY), and his bet is, of course, tied to a bullish view on oil prices.

As interest rate cuts could be underway, oil demand could surge to justify higher prices ahead and prove Buffett’s pick another profitable idea.

However, there are other stocks that are higher up in the value chain, meaning they get paid first and so attract market attention first. One of these is Chesapeake Energy, which operates in the drilling equipment and exploration industry. It sees earnings growth long before production companies like Occidental Petroleum do.

So why doesn’t Buffett buy more stocks like Chesapeake Energy? It’s because of size. Chesapeake has a market capitalization of only $9.8 billion, which is too small for Buffett’s buying power to even make a dent. This advantage for retail investors can be squeezed as Wall Street analysts also recognize the upside inherent in the company today.

The EPS growth forecast is set for up to 270.9% for the next 12 months, which is miles above the forecast of 30.8% for Occidental Petroleum. More than that, Stephens sees a price target as high as $118 a share for Chesapeake Energy stock, daring it to rally by as much as 61.1% from where it trades today.

Considering the stock's short interest is as high as 20.2% today, the upside potential today could trigger a short squeeze in this name.

Rising Mortgage and Real Estate Demand Could Trigger a Squeeze for SoFi Stock

Lower interest rates also mean lower mortgage rates, which could help the thousands of would-be homebuyers sitting on the sidelines waiting for the right financial conditions to buy a home.

Considering that the Mortgage Market Index is now at a 1997 low, the bottom could soon be set by the Fed interest rate cuts.

Knowing that SoFi is in the eye of the storm for the potential rise in real estate and mortgage demand, Wall Street analysts now forecast as much as 150% EPS growth for the next 12 months, setting this company up for a potential short squeeze that the stock short-interest is as high as 17.9% of the float.

Needham & Company analysts now reiterate their “Buy” rating for SoFi stock, with a price target set at $10 a share. This implies a net upside of 35.1% from where the stock trades today.

However, these analysts weren’t the only ones on Wall Street willing to take on their bullish view for SoFi stock.

Dimensional Fund Advisors (SoFi’s second-largest shareholder) decided to increase its stake by 263.3% as of August 2024, bringing its net investment to $86.5 million today.

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3 High Short-Interest Stocks Poised for a Rate Cut Squeeze

Kohl's Affordability Keeps Growth Prospects Strong Despite Inflation

A Buffett-Backed Energy Cycle Could Drive Chesapeake Stock to New Highs

Rising Mortgage and Real Estate Demand Could Trigger a Squeeze for SoFi Stock

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