In this article, we will be taking a look at the 10 worst booming stocks to buy according to short sellers.
Are We Really In September?
September has historically been one of the worst months for US stocks. Considering this and the performance of big tech, particularly AI stocks, in the first week of the month, many investors have been shocked by the performance of the S&P 500 and the Nasdaq Composite Index in the second week of September. Both indices showcased their best performance this year during this week, and both were up for five days in a row. So, it’s not surprising that many investors are confused about what this means and how this even came about in the first place.
According to Tom Lee, Co-founder and Managing Partner at Fundstrat Global Advisors, this is the type of performance investors can expect to see over the next eight weeks up to Election Day – and perhaps even for a couple of weeks after that. With the much-awaited Fed meeting also coming up next week, Lee expects more support especially since we already have enough reason to believe that the Fed is going to make some cuts. According to Lee, with the inflation data coming in better than before and with the labor markets needing more support, the Fed’s actions will give the markets more confidence. This will translate into stocks trading well in the upcoming weeks.
Expected Future Trends
Lee noted that, at least for the next 12 months, investors should be more confident about the markets and their performance. The potential rate cut is not the only reason for this. Another positive factor is the upcoming election – according to Lee, historically, the markets have always performed well in the months coming after an election. This past trend is making the November-December period also look good for stocks in the US. Lee also commented that the policies of both Presidential candidates are good enough for the markets to do well in 2025 as well. So, even if investors see a little more turbulence, the long-term expectations for the market seem largely positive.
In terms of what stocks investors should be looking at in this new environment, Lee noted that the general rule for any investor should be to buy the best companies in any area first. These would be the companies that are able to beat any type of cycle and promise high returns to their shareholders, basically blue chip stocks. At the same time, Lee expects that when the Fed moves rates back toward neutral, cyclical and small-cap stocks will also benefit immensely from the tailwinds created by this move. Because of this, Lee expects small-caps to do really well in the next 12 months.
These insights have highlighted that the markets are now on an upward growth trajectory, and we’ve been seeing a lot of stocks generate immense returns because of this. However, many such booming stocks are being relentlessly shorted, which may brew confusion among investors about which companies to buy now. We’ve thus compiled a list of some booming stocks that short sellers consider to be the worst players in the market and explained whether you should consider buying them or not.
Stocks
Our Methodology
We screened for stocks that have gained at least 30% year-to-date and had a short interest of at least 10%. We then ranked the shortlisted stocks based on their short interest in ascending order and also mentioned the number of hedge funds holding stakes in each stock in the second quarter.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points. (see more details here).
Worst Booming Stocks to Buy According to Short Sellers
10. Freshpet, Inc. (NASDAQ:FRPT)
Year-to-Date Performance as of September 14: 59.9%
Short % of Shares Outstanding as of September 14: 10.1%
Number of Hedge Fund Holders: 39
Freshpet, Inc. (NASDAQ:FRPT) is a packaged foods and meats provider based in Secaucus, New Jersey. It provides natural, fresh meals and treats for pets, specifically dogs and cats.
Freshpet, Inc. (NASDAQ:FRPT) is a reputable player in the pet food market and has been gaining market share in this space for several years. In the second quarter, this market share allowed the company to generate revenue of $235.3 million, up 28.3% year-over-year. Its gross profit margin also rose from 32.3% to 39.9%.
Considering the positive results, Freshpet, Inc. (NASDAQ:FRPT) raised its full-year guidance. It now sees revenue growth of at least 26%. The primary reason for such growth is its household penetration since Freshpet, Inc. (NASDAQ:FRPT) has been expanding its presence across the globe, with more and more pet owners preferring its products for their pets. This growth trajectory highlights that short sellers may be wrong about Freshpet, Inc. (NASDAQ:FRPT), especially since several hedge funds still continue to hold a stake in this stock, and investors are confident in its growth potential for the next few years.
There were 39 hedge funds long Freshpet, Inc. (NASDAQ:FRPT) in the second quarter, with a total stake value of $872.5 million.
Artisan Partners mentioned Freshpet, Inc. (NASDAQ:FRPT) in its fourth-quarter 2023 investor letter:
“We ended our investment campaigns in BlackLine, Shoals Technologies and Freshpet, Inc. (NASDAQ:FRPT) during the quarter. Freshpet sells refrigerated, fresh pet food. Our thesis is predicated on the company sitting at the intersection of two significant, long-duration trends: health and wellness, and the humanization of pets. It also has a sticky customer base, high barriers to entry and a unique distribution model. However, given a challenging backdrop of consumers trading down and increased promotional activity, we decided to move on as the stock approached our estimate of private market value.”
9. CAVA Group Inc. (NYSE:CAVA)
Year-to-Date Performance as of September 14: 199.8%
Short % of Shares Outstanding as of September 14: 10.3%
Number of Hedge Fund Holders: 33
CAVA Group Inc. (NYSE:CAVA) is a consumer discretionary player that owns and operates a chain of restaurants under the CAVA brand. It is based in Washington, DC.
This company has been working on expanding its reach in the US, for which it opened 18 new locations during the second quarter. The new locations have helped CAVA Group Inc. (NYSE:CAVA) boost its overall sales, which rose by over 14% for the quarter. While many investors have been skeptical about restaurant stocks since they usually struggle with profitability, CAVA Group Inc. (NYSE:CAVA) has been working hard not to live up to this general reputation. In the second quarter alone, the company’s profit margin was about 27%.
A major reason why CAVA Group Inc. (NYSE:CAVA) has been able to perform better than other restaurant stocks this year is its value proposition. The company offers quality food at affordable prices, and the cuisine it serves – Mediterranean – is also more differentiated than your typical restaurants. CAVA Group Inc. (NYSE:CAVA) has also been benefiting immensely from its new market entry into Chicago, which has been the strongest market entry for the company in its history.
So, while short sellers might be betting against this stock, 33 hedge funds were still long CAVA Group Inc. (NYSE:CAVA) in the second quarter, with a total stake value of $895.2 million. This highlights the company’s intrinsic value and why it should be considered a worthwhile investment.
Next Century Growth Investors, LLC mentioned CAVA Group Inc. (NYSE:CAVA) in its first-quarter 2024 investor letter:
“CAVA Group, Inc. (NYSE:CAVA) is a fast casual restaurant chain serving authentic Mediterranean cuisine, featuring customizable bowls and pitas. CAVA currently owns and operates >300 stores, and the company targets a 15% plus new store growth rate. The intermediate goal is to have 1,000 stores by 2032 with plenty of opportunity to grow beyond that level. The company already delivers solid restaurant level margins >20% and they believe 3-5% same store sales growth is achievable over time. As the business matures, they should be able to leverage G&A expense which should lead to strong earnings growth over many years.”
8. Williams-Sonoma, Inc. (NYSE:WSM)
Year-to-Date Performance as of September 14: 42.2%
Short % of Shares Outstanding as of September 14: 10.6%
Number of Hedge Fund Holders: 39
Williams-Sonoma, Inc. (NYSE:WSM) is a home furnishing retail company based in San Francisco, California. It offers cooking, dining, and entertaining products, among others.
Short sellers may be right about Williams-Sonoma, Inc. (NYSE:WSM), considering the fact that the current market is bad for home product retailers. Williams-Sonoma, Inc. (NYSE:WSM) management itself noted in its second-quarter earnings call that they are dealing with unfavorable market conditions, particularly slow housing, which is harming the demand for home products.
Considering these headwinds, Williams-Sonoma, Inc. (NYSE:WSM) saw its comparable brand revenue fall by 3.3% in the second quarter, and overall revenue declined by 4%. Company management also lowered its full-year revenue guidance, which highlights the lack of faith in Williams-Sonoma, Inc.’s (NYSE:WSM) ability to make a comeback this year. The only avenue for hope is that the Fed is expected to cut rates soon, which should support a recovery in the housing market, a development that may bolster Williams-Sonoma, Inc.’s (NYSE:WSM) growth. But until then, this stock is a bit too risky to invest in.
Williams-Sonoma, Inc. (NYSE:WSM) was spotted in the portfolios of 39 hedge funds in the second quarter, with a total stake value of $1 billion. Leonard Green & Partners was the largest shareholder, holding 3,224,030 shares.
7. Carvana Co. (NYSE:CVNA)
Year-to-Date Performance as of September 14: 190.4%
Short % of Shares Outstanding as of September 14: 11.2%
Number of Hedge Fund Holders: 61
Carvana Co. (NYSE:CVNA) is an automotive retail company based in Tempe, Arizona. It operates an e-commerce platform for buying and selling used cars.
At first glance, Carvana Co. (NYSE:CVNA) does seem to be a bad stock to invest in, seeing as its retail sales growth has been slowing. The primary reason for this was the fact that the company had been expanding too fast and too expensively. Because of this, Carvana Co. (NYSE:CVNA) has begun to focus its energy on more profitable sales, which necessarily entailed slowing down retail sales.
For many investors, an inability to keep up with expansion may be a red flag, which is why many short sellers dislike Carvana Co. (NYSE:CVNA). However, the company is poised to deliver strong results for the remainder of 2024 since it managed to increase its revenue by 15% in the second quarter and seems to be on a growth trajectory now. Seeing as the used car market is normalizing now, investors can also expect Carvana Co. (NYSE:CVNA) to grow its profits enough to pay off its large debt load, which otherwise would be a big red flag for most investors.
In the second quarter, 61 hedge funds were long Carvana Co. (NYSE:CVNA), with a total stake value of $5.1 billion.
6. International Paper Company (NYSE:IP)
Year-to-Date Performance as of September 14: 33.3%
Short % of Shares Outstanding as of September 14: 11.5%
Number of Hedge Fund Holders: 44
International Paper Company (NYSE:IP) is a paper and plastic packaging products and materials company. It sells renewable fiber-based packaging and pulp products.
This company had been garnering investor attention because of a potential acquisition by Suzano, a Brazilian company. However, the deal seems to be off, which is why International Paper Company (NYSE:IP) has ended up losing some investors who were hoping for a big premium from the acquisition. The deal fell through because International Paper Company (NYSE:IP) favored independence over consolidation.
Despite the attention lost through this development, International Paper Company (NYSE:IP) still seems like a good investment, seeing as it has been working to make operations more efficient while divesting lower-margin divisions. One such division is its cellulose operation, which, if sold off, would rake in at least $2 billion for International Paper Company (NYSE:IP).
However, International Paper Company (NYSE:IP) does have a rough journey ahead of itself, seeing as it has been underperforming on meaningful metrics for several years. The company’s sales, margins, and profitability have been on a general trend of decline. This, coupled with the Suzano deal falling through, may explain short sellers’ attitude toward International Paper Company (NYSE:IP). However, several hedge funds disagree with their sentiment and continue to hold stakes in this stock.
International Paper Company (NYSE:IP) was seen in the 13F holdings of 44 hedge funds in the second quarter, with a total stake value of $1.2 billion.
Diamond Hill Capital mentioned International Paper Company (NYSE:IP) in its second-quarter 2024 investor letter:
“Other top individual contributors in the quarter included Coherent and new holding International Paper Company (NYSE:IP). International Paper is one of the US’s largest manufacturers of containerboards, which is used to make corrugated boxes and other packaging materials. We expect that as the demand environment improves and the company focuses on its commercial execution, it will be able to improve profitability and bring operating margins back to normalized levels. Given what we view as an attractive valuation for a high-quality company, we capitalized on the opportunity to initiate a position in Q2. Shares subsequently rallied after reports that Brazilian company Suzano is interested in acquiring the company.”
5. Frontier Communications Parent Inc. (NASDAQ:FYBR)
Year-to-Date Performance as of September 14: 41.1%
Short % of Shares Outstanding as of September 14: 11.7%
Number of Hedge Fund Holders: 36
Frontier Communications Parent Inc. (NASDAQ:FYBR) is an integrated telecommunication services company that provides broadband, video, voice, and other value-added services in the communication services sector. It is based in Dallas, Texas.
Most investors following Frontier Communications Parent Inc. (NASDAQ:FYBR) right now are aware of the fact that Verizon is planning to acquire this company. While the deal seems to make sense, it has sparked concerns, particularly considering the fact that Frontier Communications Parent Inc. (NASDAQ:FYBR) has been facing financial struggles.
Frontier Communications Parent Inc. (NASDAQ:FYBR) has about $11 billion in long-term debt, and its revenue growth in the second quarter of 2% year-over-year, while encouraging, highlights that the company is not growing revenue at a rate high enough to be able to pay off its debt any time soon. This would mean that if Verizon completes its acquisition, the debt repayment would fall in its pile of responsibilities – a factor that might dissuade Verizon from moving ahead with the deal.
However, there are factors that make Frontier Communications Parent Inc. (NASDAQ:FYBR) a good investment, too. In the second quarter, the company managed to accelerate its fiber revenue growth by 13%. Frontier Communications Parent Inc. (NASDAQ:FYBR) also added a record 92,000 new fiber broadband customers this quarter, which is 37% more than last year. Seeing as how fiber is steadily being considered the more superior telecommunication product, Frontier Communications Parent Inc. (NASDAQ:FYBR) is beginning to command more market share in this space as well.
Frontier Communications Parent Inc. (NASDAQ:FYBR) had 36 hedge funds long its stock in the second quarter, with a total stake value of $2.4 billion.
4. Krystal Biotech, Inc. (NASDAQ:KRYS)
Year-to-Date Performance as of September 14: 61.3%
Short % of Shares Outstanding as of September 14: 12.9%
Number of Hedge Fund Holders: 27
Krystal Biotech, Inc. (NASDAQ:KRYS) is a biotech company based in Pittsburgh, Pennsylvania. It develops genetic medicines for patients with rare diseases in the US.
The primary reason why investors are following Krystal Biotech, Inc. (NASDAQ:KRYS) is its pipeline. It currently has multiple early-stage clinical trials that are expected to make progress in the near future, including studies testing treatments for cystic fibrosis, solid tumors, and autosomal recessive congenital ichthyosis. However, many are skeptical about Krystal Biotech, Inc. (NASDAQ:KRYS) since these are only trial-stage treatments and thus do not offer solid reasons for why they should invest in the company.
Krystal Biotech, Inc. (NASDAQ:KRYS) has gotten FDA approval for one of its treatments, Vyjuvek, a gene therapy for dystrophic epidermolysis bullosa, which is a rare skin disease. However, this is only one approval, and that is for a small market in the US. Krystal Biotech, Inc. (NASDAQ:KRYS) estimates that only 9,000 people in the world suffer from this disease. Considering this, many short sellers consider this stock to be too risky.
Still, this level of risk is intrinsic for almost every biotech company out there. And Krystal Biotech, Inc. (NASDAQ:KRYS) does have encouraging share price growth to warrant a degree of positive investor attention.
At the end of the second quarter, 27 hedge funds were long Krystal Biotech, Inc. (NASDAQ:KRYS), with a total stake value of $877.2 million.
TimesSquare Capital Management mentioned Krystal Biotech, Inc. (NASDAQ:KRYS) in its first-quarter 2024 investor letter:
Our preferences among Health Care stocks are those companies providing novel therapies for unmet needs that deserve premium pricing, or specialized service providers. Krystal Biotech, Inc. (NASDAQ:KRYS), a gene therapy company, soared 42% and we trimmed the position. Their fourth quarter sales surpassed Street estimates by a wide margin. Of note, there is now a reduced time for getting approval for Vyjuvek to treat eye lesions in patients suffering from dystrophic epidermolysis bullosa (blistering of skin).
3. MicroStrategy Incorporated (NASDAQ:MSTR)
Year-to-Date Performance as of September 14: 106.5%
Short % of Shares Outstanding as of September 14: 13.7%
Number of Hedge Fund Holders: 26
MicroStrategy Incorporated (NASDAQ:MSTR) is an application software company based in Tysons Corner, Virginia. It offers AI-powered enterprise analytics software and services.
Recently, AI stocks have been having a tough time in the market, a trend that seems to have put many investors off when it comes to riskier AI players like MicroStrategy Incorporated (NASDAQ:MSTR). However, this company does have impressive growth potential, especially considering the fact that it has been posting immense returns ever since it began acquiring Bitcoin. In terms of returns, MicroStrategy Incorporated (NASDAQ:MSTR) seems to be second only to Nvidia.
Despite this, the Bitcoin spending spree has turned out to be a double-edged sword for MicroStrategy Incorporated (NASDAQ:MSTR). Before it began buying up the cryptocurrency, it had about $531 million in net cash – a position that has since worsened into net debt of $3.8 billion as of the second quarter. This quarter, MicroStrategy Incorporated (NASDAQ:MSTR) also saw its revenue fall by 7% year-over-year, while support revenues declined by 40%.
Considering these figures, many may consider the position that short sellers have taken relative to MicroStrategy Incorporated (NASDAQ:MSTR) to be correct. However, several institutional investors and hedge funds disagree, and continue to hold large stakes in this company even today.
A total of 26 hedge funds were long MicroStrategy Incorporated (NASDAQ:MSTR) in the second quarter, with a total stake value of $442.2 million.
Artisan Partners mentioned MicroStrategy Incorporated (NASDAQ:MSTR) in its second-quarter 2024 investor letter:
“Regarding MicroStrategy Incorporated (NASDAQ:MSTR), our decision to avoid this company comes down to a lack of conviction in its franchise characteristics. The stock has worked this year due to a rebound in the price of bitcoin. Since 2020, MicroStrategy has been focused on converting its cash and cash equivalent holdings, as well as issuing debt, to fund the purchase of bitcoin, which now makes up most of the company’s value.”
2. Super Micro Computer, Inc. (NASDAQ:SMCI)
Year-to-Date Performance as of September 14: 60.2%
Short % of Shares Outstanding as of September 14: 14.9%
Number of Hedge Fund Holders: 47
Super Micro Computer, Inc. (NASDAQ:SMCI) is a technology hardware, storage, and peripherals company based in San Jose, California. It offers high-performance server and storage solutions based on modular and open architecture.
Super Micro Computer, Inc. (NASDAQ:SMCI) has also been hit by the rising negative opinion surrounding AI stocks this September, and this has only been exacerbated by a short-seller report from Hindenburg Research, which resulted in the stock falling even further than before.
The biggest red flag for investors following Super Micro Computer, Inc. (NASDAQ:SMCI) right now is that its revenue seems too dependent on AI. In the fiscal year that ended in June, the company brought in revenue of $15 billion, which is over double the amount it brought in a year ago. This may be a cause to celebrate for some, but a closer look at the company’s historical performance shows that before the AI boom, Super Micro Computer, Inc. (NASDAQ:SMCI) was seeing no revenue growth.
Considering this, investors are concerned that if we are in an AI hype cycle, stocks like Super Micro Computer, Inc. (NASDAQ:SMCI), which are heavily dependent on AI spending for their revenues, may be the first to fall if the AI hype goes down. This might also explain short sellers’ approach to this stock at present, in addition to the accounting discrepancies that are making headlines.
In total, 47 hedge funds were long Super Micro Computer, Inc. (NASDAQ:SMCI) in the second quarter, with a total stake value of $1.5 billion.
Scout Investments, Inc mentioned Super Micro Computer, Inc. (NASDAQ:SMCI) in its second-quarter 2024 investor letter:
“Super Micro Computer, Inc. (NASDAQ:SMCI) was the top detractor to returns in the second quarter. Super Micro designs and manufacturers server solutions based on modular and open-standard architecture. This modular approach combined with a strong engineering culture helps the company to supply the market with advanced servers and rack-scale compute solutions quickly. After an impressive return in the first quarter, the company offered disappointing near-term earnings guidance, though we do not believe its long-term opportunity has diminished. We expect continued strong growth for several years, although the range of outcomes is quite wide; it is difficult to forecast AI server market growth with precision.”
1. Viking Therapeutics, Inc. (NASDAQ:VKTX)
Year-to-Date Performance as of September 14: 265.04%
Short % of Shares Outstanding as of September 14: 15.5%
Number of Hedge Fund Holders: 50
Viking Therapeutics, Inc. (NASDAQ:VKTX) is another biotech company on our list. It develops novel therapies for metabolic and endocrine disorders.
Despite what short sellers may have you think, Viking Therapeutics, Inc. (NASDAQ:VKTX) is a biotech company with immense growth potential. Currently, the company has an investigational obesity drug in trials. If the drug succeeds, it could offer robust competition to major pharmaceutical companies such as Novo Nordisk and Eli Lilly, especially since Viking Therapeutics, Inc.’s (NASDAQ:VKTX) drug is administered orally – which makes it easier to take than Novo Nordisk’s Wegovy and Eli Lilly’s Zepbound.
Viking Therapeutics, Inc. (NASDAQ:VKTX) also has a strong balance sheet, reporting over $900 million in case in the second quarter. This highlights the company’s ability to keep up with all of its pipeline programs. However, seeing as the company is still far behind other pharma companies, it has been seeing greater losses. In the second quarter, for instance, Viking Therapeutics, Inc. (NASDAQ:VKTX) reported a net loss of $49.6 million. In spite of all this, many investors and hedge funds continue to stick with this stock because of the immense potential it has to grow and challenge big pharma players in the market.
We saw 50 hedge funds long Viking Therapeutics, Inc. (NASDAQ:VKTX) in the second quarter, with a total stake value of $479.1 million.
Fred Alger Management mentioned Viking Therapeutics, Inc. (NASDAQ:VKTX) in its second-quarter 2024 investor letter:
“Viking Therapeutics, Inc. (NASDAQ:VKTX) is a clinical-stage biopharmaceutical company focused on developing novel therapies for patients suffering from metabolic and endocrine disorders. Their lead drug VK2809, a beta-selective thyroid hormone receptor agonist, is in development for nonalcoholic steatohepatitis and nonalcoholic fatty liver disease. Their VK2735 drug is a GLP-1 dual agonist being developed for patients with obesity. During the quarter, the company’s shares were negatively impacted by several factors: 1) a challenging environment for biotechnology stocks, exacerbated by Fed policy decisions to maintain elevated interest rates, 2) increased competition in the obesity treatment landscape, 3) manufacturability and scalability concerns regarding Viking’s obesity drug and 4) the absence of strategic partnerships from large pharmaceutical companies. Despite the challenging quarter, we continue to believe that the company’s GLP-1 drug has the potential to be a best-in-class obesity drug given its favorable efficacy and safety profile. Further, with approximately one-third of U.S. adults suffering from obesity, we believe the company’s GLP[1]1 drug has the potential to address a large market once approved.”
While biotech players like VKTX may be lucrative investments, we believe that AI stocks hold promise for delivering high returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than the ones mentioned in our list but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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