The next GameStop? Here are the 10 most heavily shorted US stocks

Betting on these 10 shorted stocks could mean big rewards but it's important to know the risks.

When Elon Musk tweeted out support for a short squeeze on GameStop stock, its share price went through the roof. The gaming retailer's shares were up at US$347.65 a share by the close of play on Thursday in the US after starting the year at just US$17 - a 20-fold increase.

The Tesla CEO didn't start the trend: participants in Reddit's Wallstreetbets message board had been hyping it to raise its price and squeeze hedge funds that had shorted, or bet against, the company. By Wednesday the boards were already buzzing about other shorted stocks they might chase, and several were rising - although the board itself has been closed by Reddit.

The moves made GameStop, which is among the S&P 1500 index's most shorted stocks, one of the hottest names out there. It also led to a lot of buzz around other shorted stocks, including AMC Entertainment, with individual investors looking for the next big stock rocket ride. Investors not experienced in this game should be aware that the risks are as high as the potential rewards.

In shorting a stock, investors borrow shares they believe will decline in value and sell those shares. These investors hope this stock will continue to fall in value so they can buy back the shares at a lower price and pay off the loan, pocketing the difference.

Taking a contrary position to shorting can lead to big gains as well. Buying moves stock prices up, which leads those with short positions to close positions by buying even more. Some of the most heavily shorted stocks on the S&P 1500 index have in fact climbed this year.

Also read: The most heavily shorted stocks in Australia

Here are the 10 most heavily shorted stocks in the US, according to S&P Global Market Intelligence, from the Nasdaq and NYSE:

Bed Bath & Beyond (Nasdaq: BBBY)

Sure, you've probably redeemed your share of the domestic merchandise retailer's ubiquitous 20% off coupons, but watching this shorted stock could lead to more than just savings. Shares of BBBY were up more than 24% to US$46.05 on Wednesday after beginning the year at US$18.03.

Macy's (NYSE: M)

Macy's department stores struggled during the COVID-19 pandemic, with its flagship store in heavily affected New York, but the retailer is already making a comeback this year. Shares of Macy's were up 13.5% Wednesday to US$17.98. The stock opened 2021 at US$11.22 per share.

Ligand Pharmaceuticals (Nasdaq: LGND)

Biopharmaceutical company Ligand Pharmaceuticals is yet another shorted stock that is currently on the rise. Shares of LGND were up 15.42% Wednesday at US$181.05. The stock began 2021 at US$101.07.

B&G Foods (NYSE: BGS)

Although B&G is on the list of most shorted stocks, 2021 has been a delicious year so far for the processed foods company, founded in 1889. Shares of B&G were up Wednesday by 15.03% to US$43.21 after opening the year at US$27.70.

International Flavors & Fragrances (NYSE: IFF)

As its name implies, International Flavors & Fragrances makes flavors, fragrances and additives for the cosmetics industry. Shares of IFF have seen some volatility in 2021, opening the year at US$105.08 and hitting a sweet-smelling high of US$125.98 on January 12th. On Wednesday, shares were down a third of a percent to US$112.55.

The GEO Group (NYSE: GEO)

The GEO Group, a real estate investment trust (REIT) that invests in private prisons and mental health facilities in North America, Australia, South Africa and the United Kingdom, saw its stock rise by 13.63% Wednesday to US$8.42. GEO opened 2021 at US$8.75. It now has a market cap of over $1bn.

Tanger Factory Outlet Centers (NYSE: SKT)

If you want a deal on a designer handbag or those cute boots from last season, you might head on over to a Tanger Factory Outlet, owner of 32 shopping centres. It might also be a shorted stock to watch. Shares of SKT were up Wednesday by 11.27% to US$17.87. The stock began 2021 at US$9.82 per share.

iRobot (Nasdaq: IRBT)

Your Roomba cleans up your messes, but could you clean up by keeping an eye on iRobot's stock? Shares of iRobot, which are among the most heavily shorted, were up 18.06% on Wednesday at US$149.23 after beginning the year at US$79.38.

Children's Place (Nasdaq: PLCE)

The children's clothing and accessories retailer struggled in 2020, yet another victim of the retail crunch seen in the wake of the COVID-19 pandemic. It's heavily shorted, but the stock seems to be rebounding in 2021. Shares of PLCE, founder 1969, were up 3.8% at US$72.39 on Wednesday. The stock started the year at US$48.94.

Macerich (NYSE: MAC)

Macerich is the second real estate investment trust (REIT) on the list of most heavily shorted stocks. This REIT invests in shopping centres. Shares of MAC have rebounded in 2021 after getting slammed by the pandemic. In early April of 2020, shares hit a low of US$5.02. The stock was up 8.89% on Wednesday at US$21.19.

What are the risks of short squeezing stocks?

Before you chase these stocks, do take a close look at GameStop's wild ride.

Internet chatter and Musk's tweet sent shares of GameStop up by more than 300%. In an effort to minimise their losses, short-sellers were forced to sell off their shares at a loss. Short-sellers, you'll recall, are hoping these stocks will decline in value. When stocks keep rising, they have to move quickly to stem their growing losses.

Stocks can be heavily influenced by headlines, certainly something the people posting on Reddit were counting on. When shares of GameStop went through the roof, many individual investors certainly profited. But at this point, the open question is how long these prices can be sustained. (Another stock caught in this frenzy is AMC, which has risen almost 10 fold from around $2 at the start of the year).

That's true of any stock driven upward by trading action rather than fundamental business results. Such stocks are likely to be volatile going forward. Share prices may increase for a while, but they may also dive sharply and suddenly. Proceed with caution, and be prepared to keep a close watch on any position you take.