Today's Short-Squeeze Plays: MGAM

Concerns over the state of the economy have weighed on investor sentiment, sending many high-quality stocks down and creating potential short-squeeze trading opportunities. The short interest ratio (or simply the short ratio) is a measure of a stock's short position divided by the average daily volume. In other words, it is a measure of the number of days it would take short-sellers to cover their entire positions if the share price began to appreciate.

A short squeeze takes place when the share price of a shorted stock appreciates, sending short-sellers scrambling to cover their bearish positions. If there is some unexpected good news, a heavily shorted stock may surge, resulting in good returns.

When I'm looking for potential short-squeeze plays, I look for certain situations. Today, I looked at companies that have a short ratio above 15 and a market cap over $240 million. You can see the rest of the Top Short-Squeezes on Stockpickr.

One heavily shorted stock is Multimedia Games (MGAM - commentary - Cramer's Take). The gaming company has a short ratio of 29.4. Earnings in the fiscal fourth quarter rose to $1.4 million, or 5 cents a share, from $112,000, or break-even, in the year-ago quarter. Revenues fell, however, by 4% to $31.2 million. Earnings were helped by one-time items of about 3 cents a share.

Multimedia Games has been taking steps to boost growth next year, including its initiatives in Mexico and Washington, the development of new games, the conversion of several installed gaming machines to standalone 1-cent machines and the replacement of third-party machines with proprietary machines.

Analysts at Brean Murray, which has a buy rating on the company and a price target of $17, have expressed optimism regarding the long-term potential of the Mexican market.

Multimedia Games is owned by Prentice Capital. The fund also owns Ascendia Brands (ASB - commentary - Cramer's Take), which has a short ratio of 3.6; Wet Seal (WTSLA - commentary - Cramer's Take), with a short ratio of 4; and Gaiam (GAIA - commentary - Cramer's Take), with a short ratio of 13.4.

With growth initiatives in place, you may want to take advantage of the company's high short ratio.

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At the time of publication, Raznick had no positions in the stocks mentioned, although positions may change at any time.

Jason Raznick is president of Easy Stock Alerts and has been involved with the capital markets for several years. He has worked for Merrill Lynch, Dynamis and Tricap Holdings, a joint venture with Fortress Investment Group. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Raznick appreciates your feedback; click here to send him an email.