Buy The Warrants, Create A Squeeze

Yesterday we identified four small cap companies that particularly stand out as short squeeze candidates:

Alfi, Inc. (ALF)

BriaCell Therapeutics Corp. (BCTX)

1847 Goedeker Inc. (GOED)

GeoVax Labs, Inc. (GOVX)

Wallstreetbets censors DD on these stocks so we are doing write ups here instead.  We like these four in particular because recent financings mean they are well cashed up, they all have warrants and the fund manipulation is obvious. When you look at their price histories over the last few months, but particularly in June, you can see clear trading patterns. Some days these stocks trade with light volume and little volatility. Other days there are 10's of millions in volume. On those days they go up on news, then get hammered down on relatively light volume to raid stop losses and kill momentum. 

Shorts, hedge funds and other algo traders are manipulating the stock prices at the expense of retail shareholders who want to support a good startup company. Sometimes it works as they can force the company to do a financing at a cheap price and then cover after momentum is lost. But all of these companies have just raised cash and are now in a good spot to release news or other positive updates. It's time to teach these shorts a lesson and win big at their expense. 

AMC apes are fighting against the scummy moves of hedge fund shorters, attempting to create a major squeeze. While that can happen and is well deserved, there are no funds more scummy than funds that short small caps. What they do is they raise funds for a company and short the stock at the same time, maximizing profits for them at the expense of the company and its retail investors. If you want a major short squeeze, these microcap stocks offer the best opportunity. Here is an update to the chart we provided yesterday, based on Yahoo Finance data:

While the short interest as a percent of the float is around only 5% on these stocks, Yahoo's short interest data is as of May 28. Based on the surge in volume and obvious price manipulation, we think short interest is a lot higher. 

Buy the warrants, create a squeeze

One thing that these stocks have in common is that they all have warrants. The symbols are ALFIW, BCTX, GOED.WS and GOVXW. Warrants function very similarly to call options in that they are the right to buy a stock at a set price and that funds use them to hedge so that they can short the stock. The differences between warrants and calls are that warrants have a limited supply and that they generally have much longer times to expiry. These ones all expire in 2025 or later. This makes them very good to hold. If you buy short term options and the stock price moves against you for a few weeks, you lost most of your money. On these warrants, even if the stock price does nothing for a few weeks, you still have lots more time. 

Since there are a limited supply of warrants, if the public were to buy up a fund's inventory, that fund would get nervous and start covering their short sales on the stock since they no longer have the warrants to hedge. That would put buying pressure on the stock. This is similar to the gamma squeeze theory by using call options. Some might say that the call option impact can be much greater, but keep in mind that those types of gamma squeezes are on stocks with much larger floats. These stocks have floats of less than 10 million shares. It won't take that much to cause a gamma squeeze.

We would like to focus on Wednesday's trading of two of these stocks in particular. BCTX and ALFIW.

BCTXW has a strike price of $5.31. That means a warrant holder can purchase BCTXW shares by submitting a warrant and paying $5.31. Therefore, BCTXW should be no lower than $5.31 below BCTX's stock price, or else there is arbitrage. On Wednesday, BCTX reached a high of $7.58. Therefore the warrants should have had a high of $2.27, but they had a high of only $2.15. 

ALF and ALFIW was even more extreme. ALFIW's strike price is $4.57. ALF hit a day high of $9.22. Therefore the warrants were worth $4.65 at the time. The high of the day on the warrants was only $4.00, $0.65 below their intrinsic value. 

What was going on here? The stocks were getting into gamma squeeze territory. What the funds try to do is get people to sell or short the stock and buy the warrants, taking advantage of the arbitrage. This works to alleviate the buying pressure on the stock. 

How do you stop this? Buy up the warrants. The warrants are in the hedge funds' inventory and they use them as hedges in order to aggressively short the stock. Even if the stock goes upwards, they can use their warrants to purchase the shares back at $5.31 or $4.57 instead of covering on the open market. If the inventory of warrants are bought up and held by retail shareholders, the funds would no longer have that insurance policy. They would get nervous and be forced to cover, enabling the squeeze. This is a similar kind of theory to buying up call options to try to start a gamma squeeze on large cap stocks. Since none of these four microcap stocks have options on them, hedge funds don't have any alternative route to try to create synthetic shares. They will have to cover quickly.