Most Shorted US Stocks Amid Short Squeeze Talks

After markets have been roiled by the war in the Middle East that has overshadowed growing concern about private credit exposure to software companies, some weaker stocks could have become exposed. A high level of shorts could indicate these stocks are down for the count, but there's also a chance of a short squeeze that pushes them higher. Stocks could have an overabundance of shorts because they've become oversold, and they could outperform the market if there is good news on the geopolitical front.

Top 10 Most Shorted US Stocks and % of Short Float

1. Wendy's (WEN): 68%
2. Dave & Buster's Entertainment (PLAY): 66.1%
3. World Acceptance (WRLD): 62.4%
4. Paysafe (PSFE): 50%
5. Hertz Global (HTZ): 49%
6. Avis Budget (CAR): 49%
7. Cleanspark (CLSK): 47%
8. Hims & Hers Health (HIMS): 46%
9. Optimum Communications (OPTU): 44%
10. Lucid (LCID): 43%

Markets Worry About Rate Hike

This week, the benchmark US stock index, the S&P 500, has fluctuated amid optimism that the war in the Middle East is nearing an end. Traders are reacting more to rumours than news, as the US says it started talks with Iran and the latter denies any contact with the US. Although the index is just 6% off its all-time high and therefore not even in correction territory, there is growing concern that the Fed will hike rates by the end of the year. The odds of a hike were zero last Wednesday, but have now risen to 40% as traders worry that higher fuel prices will keep inflation elevated. This could continue to weigh on US equities and exacerbate losses among the more vulnerable stocks. Traders are also worried about pressure in the private credit sphere, with rising fund exits and defaults as software companies come under particular pressure in the US from AI advances. Higher interest rates could add increased pressure on this sector as well, threatening another global financial crisis. Here are some stocks that investors seem to be particularly worried about, given the high level of short interest.

Avis Budget and Hertz Facing Stiff Competition

Speaking of debt and interest rates, car rental companies have attracted attention from short sellers, given their high debt levels and difficulty with growth amid market maturity. S&P was the latest broker to downgrade Herz, specifically citing weak credit metrics and tight liquidity. Rental companies are facing stiff competition from ride-sharing apps and growing concerns that they could be displaced by robotaxis in the future. Both companies reported losses last quarter, making it difficult to pay down their debt. Not a single analyst recommends buying Herz, and of the 8 analysts, only 2 rate Avis Budget a buy.

Falling Sales Depress Wendy's

The restaurant chain was already in trouble, but its Q4 earnings report hit the market like a bucket of cold water, with the weakest US same-store sales in two decades, weak guidance, and high debt levels. Wendy's is attempting a turnaround and trades at very low valuations, but its performance has also attracted attention from retail traders who might attempt a short squeeze. The company has a high percentage of institutional holders at 94%. On the other hand, analysts are more optimistic about the company, with 66% recommending a hold (equally divided between buys and sells) to see if CEO Ken Cook's plan to close underperforming restaurants and expand internationally will pay off.