New inflation data came out Wednesday, and the news is good for stock investors, particularly for those holding highly-shorted green energy momentum stocks in particular. According to the U.S. Department of Labor, the Consumer Price Index was unchanged between April and May, which cooled down the annual inflation rate to 3.3%, a reduction of 10 basis points.
That means inflation is going down (for now), and it means momentum stocks are going up (for now). Through 1 p.m. ET today, shares of SunPower(NASDAQ: SPWR) are up 1.1%, ChargePoint Holdings(NYSE: CHPT) gained 2.5%, and Sunnova Energy International(NYSE: NOVA) raced ahead with a 10.8% increase.
Good news for some, bad news for others
What do a residential solar-power company, an electric-car charging company, and a distributed energy specialist have in common? All three are renewable energy stocks tied to the ongoing green energy revolution. According to a report earlier this week from S&P Global Market Intelligence, all three are also among the 10 most-shorted stocks in the market.
A staggering 28.9% of SunPower's shares outstanding are currently sold short, while Sunnova has 29.1% sold short, and ChargePoint 32.2%. Investors have made massive bets against these stocks.
So any good news for these companies could be enough to spook short-sellers into closing their positions (i.e., buying back shares), driving share prices higher -- resulting in even more panic, more buying, and prices going even higher! (In fact, all three of these stocks were up by double digits earlier in the day). We call this a short squeeze.
Should you buy this short-squeeze thesis?
Cooling inflation gives the Federal Reserve better arguments for cutting interest rates, which qualifies as good news for these unprofitable stocks. Of the three, SunPower is closest to profitability (analysts estimate it will get there in 2026), and Sunnova farthest away (some analysts say it will never be profitable).
All three are living on borrowed time, and borrowed money. The lower the interest rates on that money, the better for the stocks -- but I still wouldn't buy them until they turn profitable.
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Rich Smith 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.
