A short squeeze is a stock market phenomenon that occurs when a heavily shorted stock unexpectedly jumps higher. When it comes to meme stocks, short squeezes often occur because retail investors are piling in in an attempt to beat short sellers at their own game.

During a short squeeze, short sellers are forced to close out their positions as their losses accumulate and their margins are replenished.

But participating in a short squeeze can be risky. These heavily shorted companies have attracted short sellers for a reason — there are often problems with the underlying businesses.

That said, here are two stocks that look vulnerable to short squeezes and that are gaining popularity among retail investors.

(Read more from the Wall Street Memes: What Michael "Big Short" Burry Has to Say About GameStop's Stock Split)

New York-based Blue Apron Holdings  (APRN) - Get Blue Apron Holdings Inc. Class A Report  operates a platform that delivers original recipes and fresh ingredients to consumers. In addition, it also operates an e-commerce store that sells kitchenware, pantry items, and similar products.

Figure 1: Blue Apron Holdings operates a platform that delivers original recipes and fresh ingredients to consumers

However, the company goes beyond being a simple short-squeeze play. Citron Research believes that Blue Apron's business will appreciate going forward, especially in the event of an acquisition at a significant premium by HelloFresh or another strategic buyer. Peloton  (PTON) - Get Peloton Interactive Inc. Report  has even been floated as a possibly interested party.

With a current market cap of $140.9 million, Blue Apron has been heavily shorted. Currently, 28% of its float is sold short. Since its peak last December, APRN shares have fallen more than 60%, trading as low as $2 during June.

Inflation in the food industry has probably been the main cause of the decline. In addition, the company's history of net losses and the distance to near-term profitability have led short sellers to bet against Blue Apron at this time.

According to Ortex data, the average cost to borrow has been a whopping 62% in recent weeks. Considering the thin float of 17 million shares, high short interest, and growing popularity among retail investors online, Blue Apron looks like a good candidate for a short squeeze.

Figure 2: APRN overall mentions on Reddit forums on July 6.

Redbox  (RDBX) - Get Redbox Entertainment Inc. Report  is known for its public kiosks where users rent DVDs. These kiosks comprise about 90% of the company's revenues, with the rest coming from on-demand streaming services.

Figure 3: Redbox is known for its public kiosks where users rent DVDs.

The company went public again after a special purpose acquisition company (SPAC) deal last year. Previously, Redbox had been publicly traded but was bought out and privatized in 2016.

Redbox's outdated business model has been the main point of skepticism for short sellers, who have been betting massively against the stock. Last year, Redbox reported 38,379 rental kiosks in 32,586 locations, a decline from the 40,026 kiosks in 33,661 locations it had in 2020.

Experts see Redbox as a leveraged company that has been burning cash and that suddenly needs to increase its capital. A Wedbush analyst recently wrote that there's a risk of bankruptcy if Redbox doesn't receive a cash infusion and that the stock's fair value is 50 cents per share.

After shares hit $15 per share in mid-June, Redbox entered into a warrant exercise letter agreement with SPAC company Seaport Global (SGII), whereby 1 million placement warrants will be exercised at $11.50 per share, diluting its float.

However, by mid-June, the recorded short interest had increased by 48.8% from the end of May. This percentage is in line with an increase in borrow fees, which rose to unprecedented levels during May and June.

The fact that short interest has increased, even with warrants being exercised, indicates Redbox is vulnerable to an eventual short squeeze. 

(Disclaimers: this is not investment advice. The author may be long one or more stocks mentioned in this report. Also, the article may contain affiliate links. These partnerships do not influence editorial content. Thanks for supporting Wall Street Memes)

Co-producer of The Street's financial channels: Apple Maven, Amazon Maven and Wall Street Memes. Researcher and operations manager at DM Martins Research.