Retail investors strike back against short sellers? Krispy Kreme, GoPro and other meme stocks surge in pre-market trading

According to the Zhitong Finance APP, the day after Kohl's (KSS.US) was favored by retail investors in the United States, donut chain Krispy Kreme (DNUT.US), action camera manufacturer GoPro (GPRO.US), and other heavily shorted U.S. stocks surged significantly in pre-market trading on Wednesday. As of the time of writing, Krispy Kreme soared about 34% in pre-market trading, continuing its nearly 27% rise on Tuesday. GoPro skyrocketed over 83% in pre-market trading, likely to further increase on top of Tuesday's over 41% gain. Additionally, plant-based meat company Beyond Meat (BYND.US) and online gift retailer 1-800-Flowers.com (FLWS.US) both rose about 15% in pre-market trading.

According to data analysis company Ortex, approximately 32.2% of Krispy Kreme's freely traded shares are shorted, while the shorted free-floating shares of Beyond Meat and 1-800-Flowers.com account for 38% and 71.66%, respectively.

Ortex stated that Beyond Meat and 1-800-Flowers.com are currently the stocks most likely to experience a "short squeeze." Ortex co-founder Peter Hillerberg pointed out, "As these two stocks rise in pre-market trading, the likelihood of a 'short squeeze' is increasing, especially for Beyond Meat, where the demand for borrowed shares is already very high."

It is worth mentioning that this resurgence of meme stocks driven by retail speculation has previously been reflected in the soaring stock prices of Kohl's and home renovation company OpenDoor (OPEN.US). However, aside from being easily "squeezed," these heavily speculated stocks have almost no fundamental reasons to support their rise. For example, Kohl's, a retailer with 1,100 stores in the U.S., reported a loss of $15 million in the first quarter of this year, with net sales declining by 4% during the same period. The then-CEO Ashley Buchanan was also "fired" in May after the company discovered he violated conflict of interest policies by hiring suppliers with whom he had personal relationships without disclosure.

Ihor Dusaniwsky, managing director of predictive analytics at S3 Partners, who has long tracked short data in U.S. stocks, referred to these meme stocks as "battlefield stocks"—where retail investors and short sellers of these companies are in fierce confrontation in the stock market. In a research report, he stated, "In this atmosphere of heightened sentiment, even one dollar of unused capital can trigger a stampede effect, instantly breaking market balance and leading to astonishing price fluctuations within a single day. This is not just investing—it feels more like a battlefield, where emotions and strategies clash head-on." This frenzy reminds people of the speculative craze surrounding stocks like GameStop (GME.US) during the pandemic. However, just as these stocks can rise rapidly, they can also fall just as suddenly. Therefore, Barclays has stated that it is time to hit the brakes on this meme stock craze. Barclays equity derivatives strategist Stefano Pascale has proposed a possible strategy: a "dispersion trade" that is quite popular among hedge funds. This strategy combines individual stock options with options contracts on broad indices like the S&P 500. In this operation, investors can bet through options that a basket of meme stocks will have volatility far exceeding that of the S&P 500. For traders looking to make a more explicit bet on the most inflated companies, they can purchase put options to profit when these stock prices reverse.

Since early July, Stefano Pascale and his colleague Anshul Gupta have been warning that market sentiment is excessively high. They pointed out that many companies have gone public through mergers with special purpose acquisition companies (SPACs), and the strong rise of "Woodstock" Cathie Wood's ARK Innovation ETF—which holds a large number of tech stocks and has risen 73% in the past three months—are all "typical signs of a bubble market." In their research report on July 1, they wrote that these are "signs we typically associate with bubble markets." Stefano Pascale now emphasizes again that "in certain corners of the market, it indeed feels like there is a significant bubble."