As GameStop’s share price falls, which are the shorted stocks to watch?

GameStop’s [GME] share price has dominated headlines over the last week, following the massive short-squeeze rally triggered by Reddit’s WallStreetBets traders. By 27 January’s close, GameStop's share price had gained 1,744% year to date and was trading over $350 — a phenomenal gain for a stock which started 2021 at just $17.34.

According to Bloomberg, short interest in GameStop’s floated shares has now fallen to 39% — down from 114% — after hedge funds took a $20bn beating. Melvin Capital Management had a particularly bruising experience, with assets under management shrinking from $12bn to $8bn last month, according to Market Insider.

Bloomberg has described what is happening with GameStop and other tipped stocks as “flows before pros”. Be that as it may, what goes up must come down and the fallout from the pumped up valuations has already begun.

GameStop’s share price has fallen a huge 72% in the first two days of February. Tuesday saw the stock tank 60% — such a severe decline that trade was temporarily suspended as billions were wiped off the company’s value.

With GameStop’s share price rapidly falling, what other heavily shorted stocks could defy conventional trading wisdom?

Dillards

Floated shares shorted: 94.93%*

Retailer Dillard's [DDS] share price has gained 24.75% since the middle of January, despite having a whopping 94.93% of its float shorted. Such a rise could be explained by Reddit boards touting rival retailer Express INC [XPR] as the next GameStop. Express INC's own share price has soared over 263.44% YTD (as of 2 February’s close), although it is nowhere near as heavily shorted as Dillards.

Dillard also benefited from Deutsche Bank dropping its bearish call on the stock. Analyst Paul Trussell now has a hold rating on the stock, along with a $60 price target.

AMC Entertainment

Floated shares shorted: 78.97%*

The furore surrounding the GameStop short squeeze quickly turned to movie-theatre chain AMC Entertainment [AMC.L]. On 27 January, AMC Entertainment’s share price gained a blockbusting 351% to close at $19.88.. Since then, the stock seems to have flopped and closed 2 February at $7.82. Given the extent of the losses in the past few days, investors may wish to consider if the moment has passed on this one.

Virgin Galactic

Floated shares shorted: 71.95%*

Virgin Galactic's [SPCE] share price took off Monday, despite being given a downgrade from Morgan Stanley that implied the stock could drop by 30%. Adam Jonas from Morgan Stanley cut his rating from buy to hold, reducing his target price from $30 to $24.

“Investors must balance the excitement around the upcoming test flight milestones...while factoring in a slower ramp to commercial operations this year due to Covid-19 and testing delays,” Jonas wrote in a note to investors.

"Investors must balance the excitement around the upcoming test flight milestones...while factoring in a slower ramp to commercial operations this year" - Adam Jonas, Morgan Stanley

This counterintuitive trajectory could be explained, at least in part, by Virgin Galactic’s announcement of test-flights for its rocket-powered SpaceShipTwo Unity pencilled in for February.

Bed Bath and Beyond

Floated shares shorted: 65.48%*

Bed Bath & Beyond's [BBBY] share price is up over 430% so far this year as retail investors pile into the stock. The price momentum has led KeyBanc analyst Bradley Thomas to downgrade Bed Bath and Beyond to underweight from equal weight, putting a $24 price target on the stock. The analyst describes Bed Bath and Beyond's share price as “distorted” and exceeding fair value.

Since 27 January Bed Bath and Beyond's share price has crashed over 52%, although the analyst says the company is a well-run business.

Beyond Meat

Floated shares shorted: 42.89%*

Beyond Meat's [BYND] share price is up 33.12% this year, with a large helping of those gains happening at the same time as the GameStop short squeeze. Compared with some of the other short positions on this list, Beyond Meat's 42.89% of float shorted is relatively modest. This may be a case of the stock getting caught up in wider market events.

"I would advocate against investing in Beyond Meat stock hoping for a quick buck while the squeeze — if it is actually a squeeze — plays out. That's because there's no way to tell how long the music will keep playing or how high the squeeze could send Beyond Meat," explains Jon Quast on The Motley Fool.

"I would advocate against investing in Beyond Meat stock hoping for a quick buck while the squeeze — if it is actually a squeeze — plays out" - Jon Quast, The Motley Fool

So, is this the end of short trading? That seems unlikely. Barry Norris, Argonaut Capital’s CEO, told CityAM: “Although the price of any asset can be manipulated in the short-term, ultimately an investment made solely on price momentum requires incremental buyers at ever-higher prices. When inevitably these dry up – with no commensurate improvement in the company’s trading prospects – then the stock will eventually collapse.”

Wise words.

* All shorted float figures as of 3 February, The Street.