A solid second-quarter earnings season is spooking short-sellers and creating big rallies for some of the most doubted stocks in the market, according to Goldman Sachs. Sesha Phani of Goldman’s derivatives research team said in a note to clients last week that stocks with high short interest — that is, stocks where a large portion of their shares have been sold short by hedge funds — are reaping big rewards for beating expectations for the second quarter. “Stocks with low short interest declined on their earnings day, while stocks with the highest short interest rallied significantly. This average outperformance for the high short interest cohort was even evident after adjusting for the cost of options prior to their earnings report (i.e. volatility adjusted returns were high),” Phani said. The stocks with high-short interest are perceived as risky by Wall Street pros, but investors can get exposure to a “short squeeze” rally through call options. A short squeeze can occur when a heavily shorted stock starts to rise, creating buying pressure as hedge funds rush to close out their positions and limit losses. The call options serve as bets that the stock will rise above a pre-determined stock price, but the downside of the trade is limited to just the price of the options contract if the stock falls instead. There are several stocks with upcoming earnings reports that have high short interest, according to Goldman Sachs. Reporting on Aug. 9 is hydrogen energy company Plug Power . The stock has struggled in 2023, falling more than 6%, and is now down more than 80% from its 2021 highs. The short interest in Plug Power — or the percentage of available shares that are sold short — is above 23%, according to FactSet. PLUG ALL mountain Plug Power has fallen sharply over the past two and a half years. Energy drink company Celsius Holdings is also on the list and reports Aug. 8. The stock has also been a big winner so far this year, rising more than 38%. Celsius has short interest of 25%, according to FactSet. Two other companies reporting on Aug. 8 are volatile bets on different parts of the financial sector. consumer lender Upstart Holdings and crypto miner Marathon Digital . Both of those stocks have been big winners this year, with Upstart surging 359% and Marathon Digital leaping about 363%. Both stocks did decline on Friday. Those companies have short interest of 37% and 26%, respectively, according to FactSet.
