By Paul R. La Monica

Small-caps are in the crosshairs of short sellers. So are midsize stocks. The megacaps that dominate the Dow, the S&P 500, and the Nasdaq seem safe, though -- at least for now.

For small-and mid-caps, short interest -- the percentage of shares being held short by investors who think a stock will go down -- inched up to 7.5% in October from 7.3% in September, according to Melissa Roberts, an analyst with Stephens.

But short interest in megacaps fell to 1.8% from 1.9%, possibly a sign that investors are less nervous about the valuations for the top companies that dominate the big market indexes.

Healthcare small-caps and mid-cap consumer finance/lenders are really feeling the squeeze, Roberts noted in a report on Monday.

Medical equipment names STAAR Surgical and Delcath Systems and finance stocks Upstart Holdings and Credit Acceptance Corp. all posted big jumps in short interest, she said.

Two other smaller companies that Roberts identified as big targets: meme stock Beyond Meat and 1-800-Flowers.com.

And S3 Partners' Matthew Unterman, who is the research firm's managing director of short selling, pointed to two other meme stocks that shorts are circling: online home buyer Opendoor and donut seller Krispy Kreme.

A short seller borrows a stock from a broker and sells it with the hope of eventually buying it back at a lower price to make money before returning it to the lender. For example, an investor sells a borrowed stock for $50, then buys it back later for $40 -- the profit is $10 a share. Losses come if the stock keeps rising and the short seller has to cover at a higher price.

Short sellers do target larger firms as well, but it's telling that investors seem more worried about valuations and fundamentals for smaller companies than they are for large-caps, particularly for consumer companies.

And in a report from S&P Global Market Intelligence, analysts pointed out that mid-cap Cracker Barrel Old Country Store is also a top target of short sellers. The food chain has had a tough year -- angering some loyal customers with a new logo and restaurant redesign, then suspending the changes.

Short selling isn't for the faint of heart. And investors should be careful about chasing smaller stocks that are heavily shorted because they can get squeezed higher.

Here's how it usually happens: A big group of retail traders, often using Reddit or other social media sites to organize themselves, buy the stock to drive its price higher and "squeeze" the investors betting against the stock. The short sellers then are forced to buy back the stock to avoid even larger losses. A prime example is the short squeeze in GameStop, engineered by an army of traders during the height of the Covid pandemic a few years ago.

But the squeezes may not last long. Beyond Meat, for example, has gone from about 50 cents a share to just under $7.70 in the past few weeks before plummeting to around $2.

So be warned. Heavily shorted stocks can be volatile to both the downside and the upside. It's easy to get burned in either direction if you're not careful.

Write to Paul R. La Monica at paul.lamonica@barrons.com

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October 27, 2025 16:43 ET (20:43 GMT)

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