Today's Short-Squeeze Plays: SBH

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 begins 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 we're looking for potential short-squeeze plays, we prefer companies that have a short ratio above 20, a price-over-earnings-to-growth ration of less than 1.5 and a market cap over $250 million. (You can see the rest of the Top Short-Squeezes on Stockpickr.

One heavily shorted stock is Sally Beauty Holdings (SBH - commentary - Cramer's Take). The company, which is engaged in the distribution and retail of professional beauty supplies, has a short ratio of 6.7, with 9.2% of the float shorted.

While fourth-quarter profits slumped 45% to $16.9 million, or 9 cents per share, mainly on high interest expenses, the results topped Wall Street expectations. The company has a price/earnings (P/E) ratio of 40 and a P/E/G ratio of 1.14.

SBH has seen some insider purchases recently, with company director Marshall Eisenberg buying 29,000 shares on Tuesday.

Even though consumer spending may come under pressure, the company deals with exclusive-label products, which should see a rise in demand. The aging baby-boomer population could result in more and more sales of professional beauty supplies, with an increasing use of hair and skin products.

Analysts at Oppenheimer upped the target price for the company from $7.60 to $9.45 in their note to investors on Nov. 30. If you are looking for a successful low-priced retailer, I would keep SBH on your radar.

---

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.