Bed Bath & Beyond (BBBY:US) stock – heavily-shorted security – has experienced a dramatic spike over the last week or so. Since January 6, the stock has risen around 180%.

So, what’s behind this huge share price rise? And will the stock’s upward trajectory continue?

BBBY Short Squeeze

The share price rise here appears to be the result of a ‘short squeeze’.

A short squeeze occurs when a heavily-shorted stock moves higher, forcing short sellers to buy back shares to limit their losses. This short-covering activity tends to fuel the stock’s rally further.

Looking at the short interest data on Bed Bath & Beyond, it is not surprising that the stock has experienced a short squeeze.

Currently, over 90% of BBBY’s free float is on loan. And utilization (a measure of demand from short sellers) is very high at 100%.

When short interest is this high, it doesn't take a lot for a short squeeze to get started. And once they start, they can gain powerful momentum.

It seems the rally in BBBY stock was originally triggered by news that the company – which has been working with advisors in recent months to avoid bankruptcy – plans to lay off more employees in an effort to cut costs and stay in business.

“As our strategic direction changes and we streamline our operations, it is necessary to right-size our organization to ensure we are equipped for the future. Unfortunately, this has necessitated making the difficult decision to say goodbye to some of our colleagues,” said Bed Bath & Beyond in a statement.

What’s next for BBBY stock?

Will the short squeeze continue from here?

It may do, given the sky-high level of short interest.

However, it’s worth pointing out that BBBY’s days-to-cover ratio is only 1.4.

This ratio shows roughly how long it would take short sellers to cover their existing positions in days. It’s calculated by dividing the total number of shares being shorted by the stock’s average daily trading volume.

A ratio of 1.4 tells us that the short sellers could get out of this stock within a short period of time if they wanted to. In other words, the short squeeze here might not last as long as some other short squeezes.

The Short Sellers Have Had Success With BBBY Before

We would argue that investors need to be very careful with this stock.

The fact that the stock has a short interest of 90%+ indicates that institutional sentiment towards BBBY is very bearish right now.

And short sellers have had success with this stock before. In April last year, we noted that short interest here was high. At the time of our report, BBBY shares were trading near $17.50. However, they ended the year at $2.51, roughly 86% lower.

It’s not hard to see why hedge funds are targeting the stock right now. Earlier this month, the Wall Street Journal reported that Bed Bath & Beyond was planning to file for bankruptcy protection. And the company warned that doing so was a possibility, due to its poor recent performance. In a research note, Wells Fargo analyst Zachary Fadem said that BBBY’s latest results showed a “company on the brink.”

Ultimately, there’s a real chance this stock could fall to zero in the near future. So going long now is a risky approach.

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