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A Stock Strategy for Small Floats and High Shorts

Stockpickr Guest Columnist

Many investors like to pore over fundamental data in an attempt to pick the next big mover in the stock market. Fundamental data research can lead to winners, but sometimes it's only part of the puzzle to finding the big movers in the market.

One of the trading strategies I have used to great success is finding stocks with very small floats and heavy short interest. Any good news, market rumors or improvement in any type of fundamental development can send a stock with these characteristics screaming higher.

The best scenario I have found is to look for stocks with less than 100 million in the float and with a short interest of 10% or higher. Stocks are shorted often for good reasons, so make sure to look at the fundamental story behind the stock before betting on a potential short squeeze.

This strategy is really just taking advantage of supply vs. demand. Once something good breaks for the stock, the shorts have to buy in to cover, and when you combine that with the natural buying pressure you can start to see some explosive short squeezes. Hence the reason to look for stocks with smaller floats and high short interest so that the supply will not meet the demand if something bullish develops.

With all of this in mind, I have set up a portfolio on Stockpickr.com called 10 Stocks With Low Floats and High Short Interest. Let's look at a few names from the list.

Hoku Scientific (HOKU Quote - Cramer on HOKU - Stock Picks) is an interesting short-squeeze candidate with a very low float of 12 million shares and a short interest of more than 20%. This Hawaii-based company makes materials and components for the generation of electricity from clean energy technologies. Think solar panels and fuel cells.

Hoku has soared more than 247% year to date, but the stock has pulled back to around $10 off of the 52-week high of $14.55. The company recently announced it has gained the contracts to build a polysilicon plant to manufacture important components of solar panels. This is a small-cap stock with an average daily volume of around 3.5 million, so it does have trading liquidity for now.

Next up for a potential candidate is Crocs(CROX Quote - Cramer on CROX - Stock Picks), which has a float of 64 million shares and a short interest of 16%. The famous maker of plastic clogs for men, women and children also manufactures apparel and accessories such as T-shirts, hats and socks. Crocs recently announced plans to offer a clothing line for men and children.

Jeffrey Klinefelter, a Piper Jaffray analyst, rates the stock as outperform, and he cites the hiring of more sales people in markets such as China and Brazil as a reason to remain bullish on this growth story. The stock is up a whopping 165% year to date, and it's trading just below the 52-week high of $61.99, which is a sign of strength.

Another possible play is MCG Capital(MCGC Quote - Cramer on MCGC - Stock Picks). The Arlington, Va., company, which specializes in investments in middle market firms, invests in acquisitions, growth financing and leveraged buyouts. The float is roughly 60 million shares, of which about 9.6% is traded short.

The stock has dropped 30% year to date, but the firm just reported a 66% jump in second-quarter earnings, beating Wall Street expectations. Credit markets have definitely impacted the stock performance so far this year, but if the Federal Reserve cuts rates, the stock could benefit.

To see the rest of this week's picks -- including First Solar(FSLR Quote - Cramer on FSLR - Stock Picks) and Under Armour(UA Quote - Cramer on UA - Stock Picks) -- check out the 10 Stocks With Low Floats and High Short Interest portfolio at Stockpickr.com.

Please note that due to factors including low market capitalization and/or insufficient public float, we consider Hoku Scientific to be a small-cap stock. You should be aware that such stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices.