The coronavirus has had serious economic effects in addition to the numerous humane ones. In terms of financial markets, the effects have been more muted on an aggregate sense. If anything, existing trends are being exacerbated rather than being reversed.
One of the most egregious trends of 2020 has been growth-linked assets trending lower, while interest rates do the same. In a non-recessionary environment, lower interest rates are bullish for stocks and add more fuel to the market's speculative fervor. One effect of the spike in bullish risk appetites was the vertical ascent of many stocks with high short interest.
This category of stocks can see massive gains in certain environments. These stocks have a large concentration of short positions often due to serious concerns about its future viability. Therefore, they are prone to violent rallies in bullish market environments characterized by excess liquidity and/or when the fundamental situation shows signs of improvement.
An exaggerated example of this dynamic in action is the price action in Tesla (Nasdaq: TSLA) which climbed more than 100% between the new year and February 4. Here are some stocks with high short-interest which could see large gains if these market conditions persist:
SmileDirect Club
SmileDirect Club (Nasdaq: SDC) is up nearly 100% since the start of the year, but the stock still has upside given its 30% short-interest and recent, positive newsflow. The stock's gains are concentrated in the first couple of weeks of the year when it announced a promising new partnership with Walmart (NYSE: WMT) and a new program to sell directly to orthodontists. Since then, the stock has largely traded sideways with low volatility and volume relative to its move higher. It remains about 50% off its peak, IPO pricing. Short-term traders can consider getting long with a stop-loss around $13.50 with a $22 target.
Zillow
Zillow (Nasdaq: Z) is an online real estate platform that combines three themes that are working in this market - software stocks; housing; and stocks with high short interest. Its stock is 10% higher year-to-date. The company is growing sales at a rapid clip, but it continues to lose money with no immediate path to profitability.
In certain market environments that would be a problem but in these market conditions, investors are more apt to focus on the company's quest to become the premier online platform for real estate transactions, and the massive amounts of monetization opportunities that would bring. Zillow is following the same playbook as other online companies that focused maniacally on winning market share before focusing on making profits.
The strength in housing and changing shopping habits of millennial buyers is certainly supportive of Zillow as well. The stock is 30% off its all-time highs set in mid-2018. If these conditions persist, Zillow could retest these levels. Traders can consider a long position at current levels with a stop-loss at $47.4 and a $65 target.