Investors are getting increasingly fed up with the choppiness in markets lately and are looking for high-risk, high-reward bets to spice up their portfolios. The recent surge in cryptocurrencies is evidence of this trend, as speculators pile back into volatile assets like we haven’t seen since 2021. I believe this speculative fever could spill over to certain stocks as well, especially ones that have been heavily-shorted, despite strong fundamentals.
There are a number of fast-growing companies whose stocks remain depressed, creating the potential for an epic short squeeze if sentiment turns positive. While I definitely don’t recommend betting your life savings on penny stocks, a small position can pay off big if and when the shorts get squeezed out. Just don’t invest more than you can afford to lose!
When bears have relentlessly shorted a stock, they may eventually buy back their positions if the stock bounces back or even turn bullish if the company keeps beating estimates quarter after quarter. In the meantime, building modest positions in these unjustly battered stocks before a turnaround can really pay off, thanks to the power of a short squeeze.
Of course, it’s impossible to predict exactly when the shorts will capitulate, and a squeeze will happen. Penny stocks with lots of short interest can always go lower, so only gamble an amount you’re willing to lose. But for those with a high tolerance for risk, here are three penny stocks primed for a massive rally once the short sellers throw in the towel.
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ChargePoint (NYSE:CHPT) is an intriguing EV charging company that, at first glance, appears well-positioned to capitalize on the boom in electric vehicle sales. After all, with EV sales outpacing the growth in charging infrastructure, many expect substantial government subsidies to help bridge this gap, providing strong tailwinds to the industry. However, when we dig deeper into ChargePoint, the story becomes more complex.
Naturally, ChargePoint’s biggest rival is Tesla (NASDAQ:TSLA), and it would likely struggle to chip away at the behemoth’s commanding market share in EV charging. Of course, ChargePoint is also not yet profitable, and its stock has been among the most diluted in recent quarters, further weighing on sentiment. With that said, much of the bearishness seems priced in, and I believe ChargePoint could rally if investors realize the stock may be oversold at current levels.
Personally, I see ChargePoint as having likely reached a strong floor of support. The company also has enough cash to operate for a year without substantial dilution. Analysts expect ChargePoint to significantly narrow losses next year and turn profitable in about two years. Thus, in my view, it is a compelling buy at current levels.
ChargePoint already has more than 70% market share by its own claims. Even with Tesla’s fierce competition, ChargePoint can expand into Europe and other markets. However, investors should remain cautious of further dilution eroding long-term gains. Regardless, recent excessive pessimism has opened an opportunity for a strong bounce.
Terran Orbital (LLAP)
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Terran Orbital (NYSE:LLAP) is another heavily-shorted stock, with its stock price languishing primarily due to profitability concerns. However, its losses are much lower than ChargePoint’s, and its balance sheet seems reasonably healthy. Like ChargePoint, Terran Orbital is expected to reach profitability within two years, with profits expanding rapidly thereafter.
In my view, the biggest bull case for Terran Orbital is its massive $2.6 billion backlog, fueled by a contract from Rivada. The company anticipates converting 80% of this backlog into revenue over the next two years, yet its market valuation sits at just $154 million. Once Terran Orbital begins delivering on its initial orders, I believe the stock could climb substantially higher.
Of course, some still cite profitability risks, but these seem overblown compared to other space companies like SpaceX and Virgin Galactic (NYSE:SPCE) that trade at sky-high valuations despite continuous losses. In contrast, Terran Orbital’s forward price-to-earnings ratio drops below 3-times. Even looking out two years, its price-to-sales ratio of 0.6-times falls to just 0.16-times based on estimated earnings two years out.
All things considered, Terran Orbital looks like a compelling short squeeze candidate, though short interest sits around 8%, lower than other potential targets. Still, strong execution could drive sharp gains even without a true squeeze. The average Wall Street analyst sees 511% upside over the next year.
Upstart Holdings (UPST)
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Upstart (NASDAQ:UPST) has been one of the most volatile stocks this year due to its business model. The company provides AI credit risk services to banks. When banks began failing earlier this year, rattling the entire industry, many ditched Upstart and returned to traditional credit risk methods to regain confidence. However, with the Fed now providing ample liquidity, bank failures seem unlikely, and investor confidence is recovering in the financials space.
Analysts expect Upstart’s growth to reaccelerate, with massive growth projected over the next few years. After revenue declines this year, Upstart is expected to deliver around 30% growth annually over the next two years, returning to record revenue levels. It is also forecast to reach profitability in two years. Looking out to 2026 earnings, its forward price-to-earnings ratio drops below 16-times, which is quite appealing for a high-growth tech company. Upstart also has a substantial cash pile of $516 million to cover its losses for years.
I believe Upstart could surge higher once monetary policy becomes looser, as short interest sits at 41% – a massive level signaling huge upside on any positive catalyst. Its downturn resulted more from industry-wide banking challenges rather than company-specific issues, in my opinion. Thus, UPST stock will likely see upside resulting from the same catalysts, and it is only a matter of time until that happens.
On the date of publication, Omor Ibne Ehsan did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Omor Ibne Ehsan is a writer at InvestorPlace. He is a self-taught investor with a focus on growth and cyclical stocks that have strong fundamentals, value, and long-term potential. He also has an interest in high-risk, high-reward investments such as cryptocurrencies and penny stocks. You can follow him on LinkedIn.
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