Is Mercury Systems (MRCY) Poised for a Short Squeeze and Bullish Reversal in 2026?

The stock of Mercury Systems (MRCY) has recently drawn attention from both bulls and bears, with conflicting narratives emerging around its short interest, financial performance, and market sentiment. As 2026 approaches, investors are asking: Is Mercury Systems positioned for a short squeeze and a sustained bullish reversal? To answer this, we must dissect the interplay between short interest trends, the company's improving fundamentals, and evolving market dynamics.

Short Interest Trends: A Mixed Signal

Short interest in MRCY has shown a nuanced trajectory. As of Q3 2025, reports indicated a range of 8.15% to 11.19% of the float sold short, reflecting divergent bearish views. By November 2025, this figure had stabilized at 8.49% of the float, or 4.40 million shares shorted, with an average days-to-cover of 8.45. While this represents a decline from earlier highs, it remains above the 8% threshold often associated with short squeeze potential. Notably, Mercury's short interest is slightly below the peer group average of 9.42% according to market analysis, suggesting that bearish sentiment is less intense relative to its competitors. However, the days-to-cover metric-indicating how long it would take short sellers to unwind positions at current trading volumes-remains elevated enough to create upward pressure if the stock gains momentum.

Fundamentals: A Foundation for Growth

Mercury Systems' Q4 2025 results provided a compelling case for optimism. The company reported earnings per share of $0.47, far exceeding the $0.22 forecast, while revenue surged to $273 million, outpacing expectations by 12.11%. These figures underscore a turnaround in operational efficiency, supported by a 25% year-over-year reduction in operating expenses and a record $119 million in free cash flow according to earnings call data. Additionally, Mercury's total backlog reached $1.40 billion, signaling robust demand for its defense and aerospace technologies. Such fundamentals not only validate the company's strategic focus on high-margin markets but also provide a buffer against near-term volatility.

Market Sentiment: From Skepticism to Optimism

Market sentiment has shifted dramatically in recent months. Following the Q4 earnings report, Mercury's stock rose 1.7% during regular trading hours, and analysts upgraded the stock to "Strong Buy," with Raymond James highlighting its outperformance as a key catalyst according to market reports. This institutional endorsement, coupled with a declining short interest, suggests that skepticism is giving way to confidence. However, the presence of 4.40 million shorted shares still represents a tail risk-if the stock continues its upward trajectory, short sellers may be forced to cover positions, amplifying buying pressure and potentially triggering a short squeeze.

The Path to 2026: Balancing Risks and Opportunities

While Mercury Systems' fundamentals and sentiment trends are undeniably bullish, the likelihood of a short squeeze hinges on two factors: the pace of the stock's ascent and the willingness of short sellers to hold positions. A rapid price increase could accelerate covering activity, while a gradual rally might allow shorts to adjust their positions. Given Mercury's strong backlog and expense discipline, the former scenario appears more probable. Furthermore, the company's ability to sustain its Q4 momentum into 2026 will be critical. If Mercury can maintain its earnings trajectory and expand its backlog, the short interest could act as a tailwind rather than a headwind.

Conclusion

Mercury Systems (MRCY) is not a guaranteed short squeeze candidate, but the confluence of improving fundamentals, favorable market sentiment, and moderate short interest creates a compelling setup for a bullish reversal in 2026. Investors should monitor key metrics such as short interest changes, earnings surprises, and backlog growth to gauge the stock's trajectory. For now, the data suggests that Mercury is transitioning from a battleground for bears to a potential catalyst for bulls.