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3 Stocks with Good Short Squeeze Potential

Here are three intriguing short squeeze candidates that could take off with even a small bit of good news—or simply because a large enough social medi...

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This story originally appeared on MarketBeat

The dawn of social media-driven investing has brought immense interest in riding the next short squeeze stock.

Depositphotos.com contributor/Depositphotos.com - MarketBeat

A short squeeze occurs when investors that short, or bet against, a stock are forced to cover their position by buying the same stock. It coincides with a flood of regular buying activity that is often combined with bullish options trading—and more recently social media groups banded together to accelerate the buying pressure.

There is no exact science to identifying a potential short squeeze opportunity. Yet many of the biggest squeezes this year have been contrarian in nature. Stocks that fell out of favor with the market have been suddenly brought back to life with or without a fundamental catalyst.

Here are three intriguing short squeeze candidates that could take off with even a small bit of good news—or simply because a large enough social media army is amassed.

What is the Best Short Squeeze Stock?

GoodRx (NASDAQ: GDRX) is off to a bad start since making its public market debut almost a year ago. The digital healthcare company has so far failed to impress and is trading more than 30% below its IPO level.

The bears have largely been in control of the stock since mid-February and trading activity has slowed to a crawl. This may not sound like a favorable diagnosis, but GoodRx could be primed as a short squeeze play.

Short interest is 26% meaning roughly one-fourth of the float, i.e., the number of shares available for trading is borrowed. This makes GoodRx the most heavily shorted U.S. large-cap stock, a dubious distinction that also gives it the biggest short squeeze potential.

GoodRx will report second quarter performance before the open on August 12th. It is expected to eke out a small profit for the first time following a penny per share loss in Q1. A better-than-expected quarter or positive outlook from management could be all it takes to ignite a rally and exert pressure on the numerous shorts.

Is KnowBe4 Stock a Good Short Squeeze Play?

The software space is loaded with short squeeze plays and KnowBe4 (NASDAQ: KNBE) is among the biggest. The company touts itself as the world's largest security awareness platform that addresses the vulnerability of "human layer' data breaches.

There seems to be increasing interest in the platform and the growing worldwide customer base of more than 41,000 confirms it. The financials also look good with 36% annual recurring revenue growth last year and gross margins above 80%.

What doesn't look so good is the stock's recent performance. After a nice run above $35, KnowBe4 is trading back at its IPO level. It's encouraging, however, that the volume on the way down has been benign and some of the largest volume spikes have been on up days.

With corporations spending more than ever before on cybersecurity, it's hard to bet against any such software company. There are plenty who are though given the 27% short interest ratio. This is information traders should know before taking a position in KnowBe4.

Will Tattooed Chef Shorts Get Squeezed?

Tattooed Chef (NASDAQ: TTCF) seems to have the recipe for a major short squeeze run. For starters, the unusual, meme-friendly name could trigger all sorts of bandwagon social media chatter. Mix in a 31% short interest ratio and lukewarm sell-side sentiment and the chef has the potential to whip up a big rally.

Only a pair of analysts cover the stock. In June, Roth Capital assigned it a buy rating while Jeffries took a neutral stance. Since then, Tattooed Chef has continued to be one of the most polarized, heavily traded consumer defensive names. The historical volatility alone gives it serious credibility as a short squeeze candidate.

Tattooed Chef stock took off in the early days of the pandemic amid increased demand for healthy, at-home meal preparation. Its plant-based frozen food products were getting gobbled up across the country. But with restaurants reopening and consumers venturing outside the home more these days, the shorts are betting the stock now belongs on the back burner.

Putting the pandemic aside, however, more and more people are embracing the plant-based lifestyle. According to the Plant Based Foods Association, over the last 15 years, the number of Americans following a plant-based diet is up 300%. The trend is showing no sign of slowing down and food companies are still coming up with innovative plant-based foods to meet the higher demand.

The Tattooed Chef has some work to do with its cost structure as earnings have been as lumpy as smashed potatoes. But with a strong underlying consumer trend in its favor and plenty of naysayers, the short squeeze potential here is quite mouthwatering.

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