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Stockpickr: The Top 10 Battleground Stocks

James Altucher

Today I'll focus on the latter -- when a lot of investors are betting that a stock will go down, but the insiders of the company are betting that the stock will go up. In such cases, I place my bets with the insiders.

Why? Insiders know what's going on, and they are putting their money where their mouths are. When the shorts have to cover, it creates a squeeze situation, which could cause shares of a company to go up sharply.

At Stockpickr we keep track of the top 10 potential short squeezes -- a list of stocks with high short interest and high insider buying. We update this portfolio every two weeks.

One of the names on the list this week is Avid Technology(AVID), which develops and sells the most commonly used video-editing package in the world. Almost every major motion picture you see has had at least some postproduction editing done on an Avid system.

The short interest ratio on Avid's stock is 10, meaning it would take 10 entire days of pure buying for the short-sellers to completely cover their investments if the stock were to rise. And yet Avid has seen $16 million of insider buying in the past several weeks.

In March, Blum Capital Partners, a San Francisco investment firm, took a significant position in Avid. Blum has taken positions in education companies such as ITT Educational Services(ESI) and Career Education(CECO), as well as Internet-related companies such as Getty Images(GYI) and Websense(WBSN).

What's interesting is that Blum -- historically a deep value investor with phenomenal returns -- is now betting on beaten-down tech companies. To see all of its top positions, check out the Blum Capital Partners page on Stockpickr.

The shorts in Avid are betting that new products from Apple(AAPL) -- in particular, its "Final Cut" editing system -- will begin to hurt Avid. But Avid has the strongest brand in the business, and high-end professionals will never stop using its products.

With $170 million in net cash and stock that trades at 14 times cash flows, Avid is on solid ground, and any uptick in its fortunes -- which is what the insiders are presumably betting on -- will create a run on the bank for short-sellers.

Another interesting fact to note about Avid is that its institutional ownership is extremely high, something we track with Stockerblog.com Institutionalized Stocks. For those names on this list, the supply of shares for retail investors is extremely small. Again, if this company even begins a share-buyback program, the shorts will get crushed.

Another short-squeeze candidate is wireless communications company USA Mobility(USMO). The paging business is a declining business, and revenue has been declining at USA Mobility, but the important thing to consider is whether the cash flows generated by the company make up for it. In other words, if the company plans on returning more cash than the current market cap plus interest over the next five to 10 years, then this investment will be a home run.

USA Mobility's short-interest ratio is 11, and recent insider buying, according to Securities and Exchange Commission filings, is $2.9 million. One of the hedge funds that holds a position in the stock is Okumus Capital, which was founded in 1997 by Ahmet Okumus, a follower of the Benjamin Graham and David Dodd style of value investing.

None of the funds managed by Okumus Capital has experienced a down year in its history. Okumus invests in a diverse and surprising group of companies, including Wal-Mart(WMT), Dell(DELL) and Avis Budget Group(CAR). For all of its holdings, check out the Okumus Capital page on Stockpickr.

Another name with the potential for a short squeeze is Jo-Ann Stores(JAS), which has a short-interest ratio of 18 and saw insider buying of $19 million last month.

One of the professional investors in Jo-Ann shares is Robert Olstein, the chairman and chief investment officer of the Olstein Financial Alert Fund, a value stock fund that has returned an annualized 16.8%. Olstein is a retail specialist, so I like to track his latest holdings to see what retailers he likes.

For instance, as you can see from the Olstein Financial Alert Fund page on Stockpickr, he's been loading up on Federated Department Stores(FD) and, interestingly, turnaround play RadioShack(RSH).

For other names that offer potential short-squeeze plays, check out the Top 10 Short Squeezes portfolio at Stockpickr.com.