In this article, we will be taking a look at the 10 worst booming stocks to buy according to short sellers.

Are We Really In September?

September has historically been one of the worst months for US stocks. Considering this and the performance of big tech, particularly AI stocks, in the first week of the month, many investors have been shocked by the performance of the S&P 500 and the Nasdaq Composite Index in the second week of September. Both indices showcased their best performance this year during this week, and both were up for five days in a row. So, it’s not surprising that many investors are confused about what this means and how this even came about in the first place.

According to Tom Lee, Co-founder and Managing Partner at Fundstrat Global Advisors, this is the type of performance investors can expect to see over the next eight weeks up to Election Day – and perhaps even for a couple of weeks after that. With the much-awaited Fed meeting also coming up next week, Lee expects more support especially since we already have enough reason to believe that the Fed is going to make some cuts. According to Lee, with the inflation data coming in better than before and with the labor markets needing more support, the Fed’s actions will give the markets more confidence. This will translate into stocks trading well in the upcoming weeks.

Expected Future Trends

Lee noted that, at least for the next 12 months, investors should be more confident about the markets and their performance. The potential rate cut is not the only reason for this. Another positive factor is the upcoming election – according to Lee, historically, the markets have always performed well in the months coming after an election. This past trend is making the November-December period also look good for stocks in the US. Lee also commented that the policies of both Presidential candidates are good enough for the markets to do well in 2025 as well. So, even if investors see a little more turbulence, the long-term expectations for the market seem largely positive.

In terms of what stocks investors should be looking at in this new environment, Lee noted that the general rule for any investor should be to buy the best companies in any area first. These would be the companies that are able to beat any type of cycle and promise high returns to their shareholders, basically blue chip stocks. At the same time, Lee expects that when the Fed moves rates back toward neutral, cyclical and small-cap stocks will also benefit immensely from the tailwinds created by this move. Because of this, Lee expects small-caps to do really well in the next 12 months.

These insights have highlighted that the markets are now on an upward growth trajectory, and we’ve been seeing a lot of stocks generate immense returns because of this. However, many such booming stocks are being relentlessly shorted, which may brew confusion among investors about which companies to buy now. We’ve thus compiled a list of some booming stocks that short sellers consider to be the worst players in the market and explained whether you should consider buying them or not.

Our Methodology

We screened for stocks that have gained at least 30% year-to-date and had a short interest of at least 10%. We then ranked the shortlisted stocks based on their short interest in ascending order and also mentioned the number of hedge funds holding stakes in each stock in the second quarter.

Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points. (see more details here).

Worst Booming Stocks to Buy According to Short Sellers

10. Freshpet, Inc. (NASDAQ:FRPT)

Year-to-Date Performance as of September 14: 59.9%

Short % of Shares Outstanding as of September 14: 10.1%

Number of Hedge Fund Holders: 39

Freshpet, Inc. (NASDAQ:FRPT) is a packaged foods and meats provider based in Secaucus, New Jersey. It provides natural, fresh meals and treats for pets, specifically dogs and cats.

Freshpet, Inc. (NASDAQ:FRPT) is a reputable player in the pet food market and has been gaining market share in this space for several years. In the second quarter, this market share allowed the company to generate revenue of $235.3 million, up 28.3% year-over-year. Its gross profit margin also rose from 32.3% to 39.9%.

Considering the positive results, Freshpet, Inc. (NASDAQ:FRPT) raised its full-year guidance. It now sees revenue growth of at least 26%. The primary reason for such growth is its household penetration since Freshpet, Inc. (NASDAQ:FRPT) has been expanding its presence across the globe, with more and more pet owners preferring its products for their pets. This growth trajectory highlights that short sellers may be wrong about Freshpet, Inc. (NASDAQ:FRPT), especially since several hedge funds still continue to hold a stake in this stock, and investors are confident in its growth potential for the next few years.

There were 39 hedge funds long Freshpet, Inc. (NASDAQ:FRPT) in the second quarter, with a total stake value of $872.5 million.

Artisan Partners mentioned Freshpet, Inc. (NASDAQ:FRPT) in its fourth-quarter 2023 investor letter:

“We ended our investment campaigns in BlackLine, Shoals Technologies and Freshpet, Inc. (NASDAQ:FRPT) during the quarter. Freshpet sells refrigerated, fresh pet food. Our thesis is predicated on the company sitting at the intersection of two significant, long-duration trends: health and wellness, and the humanization of pets. It also has a sticky customer base, high barriers to entry and a unique distribution model. However, given a challenging backdrop of consumers trading down and increased promotional activity, we decided to move on as the stock approached our estimate of private market value.”

9. CAVA Group Inc. (NYSE:CAVA)

Year-to-Date Performance as of September 14: 199.8%

Short % of Shares Outstanding as of September 14: 10.3%

Number of Hedge Fund Holders: 33

CAVA Group Inc. (NYSE:CAVA) is a consumer discretionary player that owns and operates a chain of restaurants under the CAVA brand. It is based in Washington, DC.

This company has been working on expanding its reach in the US, for which it opened 18 new locations during the second quarter. The new locations have helped CAVA Group Inc. (NYSE:CAVA) boost its overall sales, which rose by over 14% for the quarter. While many investors have been skeptical about restaurant stocks since they usually struggle with profitability, CAVA Group Inc. (NYSE:CAVA) has been working hard not to live up to this general reputation. In the second quarter alone, the company’s profit margin was about 27%.

A major reason why CAVA Group Inc. (NYSE:CAVA) has been able to perform better than other restaurant stocks this year is its value proposition. The company offers quality food at affordable prices, and the cuisine it serves – Mediterranean – is also more differentiated than your typical restaurants. CAVA Group Inc. (NYSE:CAVA) has also been benefiting immensely from its new market entry into Chicago, which has been the strongest market entry for the company in its history.

So, while short sellers might be betting against this stock, 33 hedge funds were still long CAVA Group Inc. (NYSE:CAVA) in the second quarter, with a total stake value of $895.2 million. This highlights the company’s intrinsic value and why it should be considered a worthwhile investment.

Next Century Growth Investors, LLC mentioned CAVA Group Inc. (NYSE:CAVA) in its first-quarter 2024 investor letter:

“CAVA Group, Inc. (NYSE:CAVA) is a fast casual restaurant chain serving authentic Mediterranean cuisine, featuring customizable bowls and pitas. CAVA currently owns and operates >300 stores, and the company targets a 15% plus new store growth rate. The intermediate goal is to have 1,000 stores by 2032 with plenty of opportunity to grow beyond that level. The company already delivers solid restaurant level margins >20% and they believe 3-5% same store sales growth is achievable over time. As the business matures, they should be able to leverage G&A expense which should lead to strong earnings growth over many years.”

8. Williams-Sonoma, Inc. (NYSE:WSM)

Year-to-Date Performance as of September 14: 42.2%

Short % of Shares Outstanding as of September 14: 10.6%

Number of Hedge Fund Holders: 39

Williams-Sonoma, Inc. (NYSE:WSM) is a home furnishing retail company based in San Francisco, California. It offers cooking, dining, and entertaining products, among others.

Short sellers may be right about Williams-Sonoma, Inc. (NYSE:WSM), considering the fact that the current market is bad for home product retailers. Williams-Sonoma, Inc. (NYSE:WSM) management itself noted in its second-quarter earnings call that they are dealing with unfavorable market conditions, particularly slow housing, which is harming the demand for home products.

Considering these headwinds, Williams-Sonoma, Inc. (NYSE:WSM) saw its comparable brand revenue fall by 3.3% in the second quarter, and overall revenue declined by 4%. Company management also lowered its full-year revenue guidance, which highlights the lack of faith in Williams-Sonoma, Inc.’s (NYSE:WSM) ability to make a comeback this year. The only avenue for hope is that the Fed is expected to cut rates soon, which should support a recovery in the housing market, a development that may bolster Williams-Sonoma, Inc.’s (NYSE:WSM) growth. But until then, this stock is a bit too risky to invest in.

Williams-Sonoma, Inc. (NYSE:WSM) was spotted in the portfolios of 39 hedge funds in the second quarter, with a total stake value of $1 billion. Leonard Green & Partners was the largest shareholder, holding 3,224,030 shares.