The stock market's current ascent began in early October, and it's basically continued undisturbed. There was a 3% dip in early December on negative trade headlines, and some consolidation to start the New Year as overbought technical readings were digested.
This late in the rally with prices having gained so much, there's clearly more risk than buying one week or one month ago. That being said, it doesn't justify betting against the trend. One strategy to take advantage of an overextended, bullish market is to look at stocks with high short-interest readings. These stocks can see big gains under these circumstances due to the effect of rising prices forcing even more short covering.
This has been playing out as some of the biggest winners this year have been stocks with heavy short interest including Tesla (Nasdaq: TSLA), SmileDirectClub (Nasdaq: SDC), and Beyond Meat (Nasdaq: BYND). It's also worth noting that these types of moves tend to happen as climactic events in uptrends. These types of gains are unusual and in response, traders should start managing risk more aggressively as the odds of a trend turn increase.
Tesla
Tesla is up 33% year-to-date. The stock began the year with a gap up just under its all-time highs and has continued moving higher. Beyond broad market strength, the stock has been supported by Tesla's success in increasing production and opening a new facility in China where sales are expected to be strong. However, the stock's explosive gain in such a short period of time was surely abetted by its 18% of its float being short.
Given this massive gain, Tesla's market cap is over $100 billion which makes it the largest automaker, even though it produces a fraction of the cars that other companies produce. Of course, this type of egregious overvaluation is exactly what got the shorts excited about shorting the stock in the first place.
Beyond Meat
Beyond Meat has a similar story to Tesla with a potentially revolutionary product, overvalued stock, and a blazing start to 2020. Its stock is up nearly 60% in the first three weeks of the year. Like Tesla, there is a combination of fundamental catalysts paired with more than one in five shares being sold short.
More and more restaurants and groceries across the world are stocking Beyond Meat's products, and the company has staked out a clear first-mover advantage in the "fake meat" space. Shorts are skeptical that the product won't be a fad or fall victim to a myriad number of competitors which could hurt margins. Unfortunately, many shorts were probably forced buyers during the stock's rampage higher even though they may remain bearish on a longer-term perspective.
SmileDirectClub
SmileDirectClub has 22% of its shares sold short and a nearly 50% gain for 2020. Its stock was down 75% to close 2019 from its opening IPO levels, largely due to scrutiny about whether its product was legal in many states. Although these concerns remain, SmileDirectClub did win approval to sell its products to consumers directly in New Jersey.
The company also announced plans to sell its products directly to dentists and orthodontists, giving it a lifeline in states where licensed dentists are required for all procedures. SmileDirectClub also announced a partnership with Walmart (NYSE: WMT) for a limited trial period of in-store sales. These positive catalysts in concert with the beaten-down stock and high short interest led to the stock's 50% gain in three weeks.