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Short Squeeze Candidates Amid Tech Fire Sale

Super Micro Computer (SMCI) has a big few weeks coming up, and short sellers piling on

Managing Editor
Jul 23, 2024 at 11:46 AM
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Subscribers to Chart of the Week received this commentary on Sunday, July 21. This is a repost, with an updated intro and fresh data for the major index stats.

Two of the bigger stories of the stock market this summer are paradoxical. In one corner you have the massive dominance and omnipotence of large cap tech stocks as they carry broad market equities to new heights. And in the other corner there’s the quiet perseverance of small caps on the Russell 2000 Index (RUT), carving out a channel of higher highs since November. Both large and small caps were flying high as recently as Monday, until a tech rotation took the wind out of Wall Street’s sails.

By the time the dust settled Friday afternoon, the Nasdaq-100 (NDX) and Invesco QQQ Trust Series 1 (QQQ) logged their worst week since April, and the VanEck Semiconductor ETF (SMH) finished at its lowest level since early June. The RUT finished higher for the week, but on Thursday suffered its worst single-session decline since April 30. However, zoom out a little on the bullish market conditions that Wall Street currently still finds itself in. Within this week’s wreckage, both QQQ and RUT have some stocks that stand out. There is opportunity to take a flier on both reliable and speculative names in the tech sector that are suddenly marked down.

Small Caps, Large Caps

Super Micro Computer Inc (NASDAQ:SMCI) started 2024 as a small cap on the RUT and graduated to the S&P 500 Index (SPX) in March, which helped vault the stock to as high as $1,229. Closing below $800 to end the week, SMCI was trading at $963 last Monday, and is now below its $50 billion market cap level. Short sellers have piled on in the last month, up 13.4% in the two most recent reporting periods.

On July 22, the server and storage solutions specialist for semiconductors will join the tech-heavy NDX, replacing Walgreens Boots Alliance (WBA), a sign of the times if there ever is one. This shift will bring even more of an influx in demand to the already popular stock, an intriguing notion considering the healthy 9% of SMCI’s total available float sold could be enough fuel for a turnaround. Of the stocks on the NDX, SMCI is the largest one based on market cap with this much short squeeze potential. And while it’s an imperfect indicator, the shares’ 14-Day Relative Strength Index (RSI) also sits at 34, on the cusp of oversold territory.

Super Micro reports earnings on Aug. 6, and in the last eight reports, five of the stock’s last post-earnings moves have been positive, with an average historical move of 13% in the last two years. For a tech stock that has been indestructible all year, those are a lot of contrarian tailwinds that could fuel a bounce back.

Options traders should also be on the lookout for a stock split. While every earnings call from a tech company nowadays features buzz words like “accelerating demand” and astronomical projections, Super Micro’s emphasis on liquid cooling are could avoid the skepticism growing about the energy required to power all of these lofty AI goals. If Super Micro can nail this technology, it won’t have to worry about falling short of fuzzy projections, and the investor interest may prompt the company to split its stock to attract retail investors.

SMCI COTW

If a big boring sleeping giant like SMCI isn’t your speed, there are small caps to monitor that fit the profile of heavily-shorted stocks that have corrected as part of the tech rotation. C3.ai Inc (NYSE:AI) is in the midst of a four-day losing streak and shed 6.3% last week, and a whopping 25% of the stock’s total available float is sold short.

Another RUT standout is Semtech Corp (NASDAQ:SMTC), up 44% in 2024 but gave back 11% this week alone. The Silicon Valley-based internet of things (IoT) semiconductor has seen short interest marginally rise in the most recent reporting period, but the 11.96 million shares sold short account for nearly 19% of SMTC’s total available float. At the stock’s average pace of trading, it would take almost six trading days for shorts to buy back their bearish bets.

Other stocks to follow include data center stock DigitalOcean Holdings Inc (NYSE:DOCN) and semiconductor processor Veeco Instruments Inc (NASDAQ:VECO), both of which were in the red this past week but have roughly 12% of their total available float sold short, respectively. The thread connecting AI, SMTC, DOCN, and VEOC? They are the four information technology (I.T.) stocks with the most weight (by percentage) within the RUT that have double-digit short interest-to-float percentages. Note also in the table below the added intrigue of AI, DOCN, and SMCI all being ripe for a round of overdue upgrades.

Short Interest Tech

Big Tech and small caps seem like an odd couple or a panned buddy cop movie. But if tech stocks of all market cap size are thriving, that seems like a good sign of the overall health of the stock market. So if you believe that this past week’s tech rotation was just a blip on the radar and a necessary forest fire to clear out some overbought brush, then there’s a wide array of tech stocks that should be on the top of your watch list.

 

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