Stockpickr: Top 10 Short Squeeze Stocks

In his newest book, Mad Money: Watch TV, Get Rich, Jim Cramer suggests it's often profitable to target the short-sellers.

Short selling, or selling short, is a technique used by investors who try to profit from the falling price of a stock. If the stock starts to move against them, the only way short-sellers can stem their losses is by buying back the shares they sold short.

A buying frenzy, or a short squeeze condition, is created if too many short-sellers try to buy back shares when no one is selling. Stocks can go up in a parabolic fashion if that happens.

At Stockpickr, we update our portfolio of the top 10 potential short squeezes every few weeks. We look not only for stocks with high short ratios (the number of shares sold short divided by average daily volume) but also for insider buying, suggesting that management is putting its own money to work against the short-sellers. Last month, this list had enormous success with PW Eagle(PWEI Quote) -- it announced it was being acquired.

Let's examine a name that's on the list currently. Waste Services(WSII Quote), at first glance, looks ugly. The company has $1.7 million in cash and $316 million in debt. Its operating margin is a slim 5.19%. So it's no wonder that there are 1.39 million shares short and that the company's stock price has floundered over the past year.

But the story doesn't end there.

With 1.39 million shares short, it would take short-sellers 25 days to cover all of their short positions. That's a long time if the stock starts to really move. And value-oriented hedge fund Prides Capital has steadily been accumulating shares of Waste Services. Last month, Prides Capital bought $16 million worth of shares at $9.50 per share. And another fund, Westbury (Bermuda), bought $50 million worth of shares.

Additionally, Waste Services CEO David Sutherland bought $15,856 worth of shares at $9.91 per share. The two funds bought shares directly from the company, and the proceeds were used to pay down some debt and also buy a new facility in Florida. The company is returning to profitability this year, and analysts expect 13% revenue growth over the next year.

Waste Services (WSII)

Although the debt load at Waste Services is large, so are the cash flows. With $67 million in EBITDA (earnings before interest, taxes, depreciation and amortization), the company trades at just 10 times cash flows. I wouldn't be surprised to see Prides or Westbury attempt a leveraged buyout over the next year, something that would crush the short-sellers.

Prides even states on its Web site: "We look for companies of high quality which we can purchase below their intrinsic values, and with which we can create an active partnership with management to add and create value."