What is short selling? Short selling allows investors to make money from declining stocks, meaning that you can make money even when the market is contracting.

Shorts can be an interesting target for both short and long-term investment opportunities, but let's remember; in most cases, there's a reason the short interest is so high. The short squeeze saga of 2021 will be remembered fondly in the hearts of retail investors, but these occurrences are few and far between. That being said, there are a couple of small-cap picks out there for investors willing to add a high-risk-reward opportunity to a diversified portfolio.

1. Citi Trends (25% float shorted)

Citi Trends (NASDAQ: CTRN) is the leading specialty discount retailer for African American and Latinx families. Its primary product categories are apparel, home and lifestyle, and beauty products.

One issue that faces many shorted stocks is failure to meet expectations; they could be in growth mode, or maybe it's just a failing business model, but this is where Citi Trends hits a home run -- it has surpassed earnings expectations in all of the last four quarters, making a mighty recovery since it was forced to close stores due to the COVID-19 pandemic in 2020.  

It's definitely not the sexiest business in the world, but the company remains competitive by targeting underserved customers at competitive prices, fundamentals appear solid, and it actually has an operating margin of 6.9% which is on the high-end compared to most discount retailers.

2. Lemonade (35% float shorted)

Lemonade (NASDAQ: LMND) is an AI insurance provider primarily involved in renters insurance. Its most recent all-stock acquisition of Metromile and the launch of Lemonade Car highlights the company's expansion into car insurance as well, and we've got a full article on the acquisition too, that you can read here.

With some personal experience in the insurance industry, I can tell you it can definitely be a stressful task for customers when it comes to seeking appropriate and affordable cover. Lemonade makes taking your policy out simple; basic details, and short questions, and you're ready to go. Ease of use is front and center in everything Lemonade does, having achieved 4.9 stars on the App Store, and aiming to "delight" customers.

For both insurers and brokers, one of their biggest costs is staffing, so Lemonade benefits in operational efficiencies. Lemonade is eliminating these costs using AI functionality through its smart AI bot for customer service named "Maya", and Lemonade even uses AI for the payout of claims, which can be determined in minutes.

One concern investors have shown is the "give back" feature, which donates some profits to charity. It's great to see, but some would prefer the money reinvested in Lemonade's growth, and others say that it is irresponsible, as, if a black swan event occurred, payouts could come under pressure, and even with reinsurance, irresponsible management of a risk pool could lead to greater reinsurance costs in the future.

3. iRobot (46% float shorted)

iRobot (NASDAQ: IRBT) is a robot vacuum cleaner company and a disruptor to the traditional vacuum cleaning market. Its most recent quarter beat saw a gap up in the share price, despite supply-chain constraints. You can read more about the report and the company here. 

iRobot has a patent portfolio of over 1,500 patents worldwide and has the first-mover advantage over competitors. It continues to invest further in research and development to make its vacuum cleaners the gold standard when new iterations of the tech come out. 

iRobot already has a tech advantage that will stretch further, and with a visionary CEO and roboticist in Colin Angle at the helm, this company is still in the early innings of where it can go long-term. 

Are you looking for the right company to kickstart your portfolio? Look no further than MyWallSt, where our shortlist of market-beating stocks will take you to the next level. Don't believe us? Why not get free access today?