This Short-Squeeze Candidate Could Actually Pan Out in the Long Run

Aside from selling a stock for a higher price than you bought it for or collecting dividend payouts, one way investors make money from stocks is through options. Stock options give investors the right to buy or sell a stock at a predetermined price and date. Call options are a bet that a stock's price will rise, and put options are a bet that a stock's price will decline.

Like put options, short selling is a way to profit from a stock's decline. When an investor shorts a stock, they essentially borrow shares at a given price and sell them immediately, with the thought that the price will drop and they can repurchase those shares later for less money and profit the difference.

For example, if you borrow 100 shares of a company while the stock price is $50, you can sell them for $5,000. If the price drops to $40, you can purchase those same 100 shares back for $4,000, return them, and pocket the $1,000 difference. A short squeeze occurs when a shorted stock's price rises and investors rush to buy back the borrowed shares before the price increases even more. Since this increases demand, the stock's price inevitably rises, creating a cycle.

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Off to a rocky start

Weber (NYSE: WEBR) is a leader when it comes to outdoor cooking, making products such as charcoal grills, smokers, gas and electric grills, and most recently, smart grills. The Illinois-based company went public in 2021, pricing its initial shares at $14. The company opened at $17 per share when it began trading on Aug. 5, 2021, and the price is down more than 40% to just over $10 per share as of March 10, 2022.

Of Weber's float — the number of shares available for the public to buy and sell — nearly 24% are shorted as of Feb. 15, 2022. There is no definite percentage that's considered “high,” but generally speaking, any amount over 20% is deemed high.

Why things can pan out

While Weber has had a somewhat rocky start since its IPO, that doesn't mean things can't turn around. In fact, the company is in a position for this to happen. To begin, the company is a leader in the space, capturing 24% of the global market while doing business in 78 countries.

In fiscal year 2021, Weber brought in $1.98 billion in revenue, with $825 million as profit — both of which are in a good position to increase, given the growth of the outdoor cooking industry. In 2015, outdoor cooking was a $12.7 billion industry, and by 2020, that number had increased to $14.8 billion. It's expected to grow to $18.4 billion by 2025.

Even if Weber is only able to maintain its current market share, that leaves room for revenue and profit growth in the coming years. The company has 193 U.S. patents, 722 foreign patents, and 311 patents pending worldwide; combine that with the company's emphasis on innovation, and it's surely in a position to maintain its spot as the industry leader and thrive.

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Stefon Walters has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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