Squeezing the Shorts: Retail Stocks

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By Jonas Elmerraji

BALTIMORE (TheStreet) -- Recent rallies off of historic lows. Waning investor confidence. Blue chips not so blue any more. Now more than ever, we're looking at a perfect setup for some potentially profitable short-squeeze plays.

One of the best places to look is retail. Retail stocks have been absolutely decimated in the last year, as consumer spending fizzled in reaction to the recession. But now, with increasing evidence that the economy may be turning around and, more important, with analyst-beating earnings numbers coming out for many companies last quarter, could the bears be wrong in thinking that retail has further to fall?

That's where the short squeeze comes in.

A short squeeze is the buying frenzy that ensues when a heavily shorted company starts to look attractive again to investors. As more and more of the short investors buy shares to cover, share prices skyrocket. Almost anything can trigger a short squeeze: trumping earnings expectations, winning a lawsuit, unveiling a new product -- even announcing a management change.

One of the best indicators of just how high a short-squeezed stock could go is the short interest ratio, which divides shares short by average daily trading volume in order to get a ballpark estimate of the number of days it would take for short-sellers to cover their positions. The higher the short ratio, the higher the potential profits when the shorts get squeezed.

This week, Stockpickr has reviewed retail stocks to find those with high short interest ratios and the catalysts to trigger a squeeze. Here's a look at this week's potential plays.