Is a Hims & Hers short squeeze brewing?

Once it was clear that Hims & Hers’ ability to sell exact copies of Ozempic and Wegovy was coming to an end, the short sellers came running. While that may have been a fruitful trade in the beginning, recent events may have created the environment for a short squeeze.

Hims has exceptionally high short interest and shares are up 48% over the past month after a partnership with Novo Nordisk was announced. The company reports earnings after the bell on Monday, which could trigger a surge in share price — or, as the hedge funds short on Hims are probably hoping — a plunge that puts it back to where it was a couple weeks ago.

Hims has roughly 33% short interest as a percentage of float, which means about a third of the available shares have been sold short but are not yet covered. When someone shorts a stock, they borrow shares and sell them with the intention of buying it back later at a lower price. Ideally for them, the price falls, and they pocket the difference (less the cost of borrowing the stock).

Short interest in the company rose in October, after the Food and Drug Administration declared that the shortage of tirzepatide, the active ingredient in Eli Lilly’s GLP-1 drugs, was over. Hims never sold compounded tirzepatide, but that announcement fueled expectations that the shortage of semaglutide — the active ingredient in Ozempic and Wegovy, which Hims does sell — would end soon after.

That did in fact happen in February, limiting Hims’ ability to continue selling copycat versions of the drug. The stock tanked by about 50% in a month, which was good news for the large chunk of traders short on the stock.

But, as the path forward for its weight-loss biz starts to take shape, the company’s stock has risen. Its announcement last week that it would partner with Novo led the stock to rise by more than 40%, and it has kept those gains.

Investors will be closely watching the company’s earnings report for more clues on where its weight-loss business is going. Short sellers will be hoping for an earnings miss or other news that tanks the stock price.

If it rises or even just keeps its gains, that means short sellers have to buy back their borrowed shares at a higher price than they sold them. For example, if a short seller sold Hims stock on April 22 at $25, today they could buy it back at $41 — a $16 loss per share. They might wait for after earnings to see if the results push the price down and help them cut their losses, but if the report causes the price to spike even more, they’ll likely run to buy back so they can limit their losses.

That frenzy could create demand, pushing the price even higher and putting other short sellers in an even more dire situation. That’s what’s known as a short squeeze.