Contextlogic Might Not Be the Short-Squeeze Candidate You Think It Is

Stocks to sell

Self-billed as one of the largest e-commerce marketplaces in the world, I can fundamentally appreciate the bullish catalyst supporting Contextlogic (NASDAQ:WISH) today. Particularly in the age of the novel coronavirus, online businesses offer tremendous appeal. That said, most speculators probably aren’t thinking about the fundamentals when it comes to WISH stock.

The logo and information for the Wish (WISH) mobile app are displayed on a smartphone.

Source: sdx15 / Shutterstock.com

Instead, according to my peers in the investment analysis space, Contextlogic is a “meme stock.” From what I gather, this trading category is defined as an asset that features a strong following on social media, particularly because Wall Street insiders are betting against it. However, I’ve noticed that many internet folks are sensitive about mislabeling meme trades.

All I can say, though, is that “meme stock” is what many analysts are calling WISH. But I could care less what people want to label it. Rather, I’m concerned about the viability of the upside narrative here.

WISH Stock and Social Media

One of the reasons why social media traders have latched onto WISH stock is its short percentage of float. At about 12% as of Jun. 15, this name has definitely attracted bearish attention. While there are no hard-and-fast rules, typically a short percent of float of 10% or higher indicates a considerably pessimistic attitude toward the target asset.

However, before you dive into the contrarian trade here, you should also note that the short ratio (or days to cover) is only 0.29. This stat refers to the fact that bearish traders only need less than one day based on average trading volume to cover their position.

From my perspective, if you’re attempting to profit from a risky trading tactic, you’d presumably want the odds in your favor. So, with only the short percent of float working with you here, speculators should think twice about WISH.

Before Buying, Look at Other Memes

Those who want to induce a short squeeze in WISH stock  — buying up heavily shorted shares to force bearish traders to cover their positions — should really think multi-dimensionally. You don’t want to just focus exclusively on the short percent.

Recent trading history suggests that going contrarian and forcing the bears into tight quarters provides the best chance for success. For instance, according to data from MarketBeat.com, the short ratio was 10.3 when Gamestop (NYSE:GME) featured a short percent of float above 100%. These stats translate to heavily negative sentiment and two weeks (or 10 business days) to cover should the negative trade go awry.

At the first round of the squeeze, GME stock soared to a closing price of nearly $350. Then, during the second concerted attempt at a short squeeze, GME closed just above $302. But in that second attempt, you can also see that — while the short percent was very high — the days to cover was one day or less.

Presumably, the bulls scared many bears away from their positions there. However, they couldn’t impose a chokehold on negative traders because GME volume was ample enough to allow an escape route if they needed it.

So, while it’s no guarantee that the bulls won’t be able to drive WISH stock higher in this case, the days to cover being almost nothing should definitely make you reconsider throwing your money into this trade.

Other Evidence Suggests That WISH Stock Is a Bull Trap

Beyond the possibly faulty short-squeeze argument, WISH stock has other issues to worry about as well.

First, on a technical basis, the optimism for shares has died down in recent sessions relative to the massive gains we’ve seen previously. Perhaps the astute traders of WISH saw that further upside was less probable.

Secondly, though, Contextlogic doesn’t provide the greatest financial performances. Yes, the company generated $2.54 billion in revenue in 2020, up nearly 34% from 2019’s result. However, during the same period, WISH’s operating income loss expanded to $631 million from a loss of $144 million. That’s not what investors want to see, particularly for such a relevant sector like e-commerce.

All told — while I can appreciate why someone would want to trade WISH stock given all the social media fervor — both the trading tactic and the fundamental catalyst appear flawed here.

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On the date of publication, Josh Enomoto held a long position in GME. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.

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