Squeezing the Shorts: Apparel Stocks

Not a Stockpickr member? Join the community today -- for free.

By Jonas Elmerraji

BALTIMORE (TheStreet) -- The recession is "very likely over," claimed Fed Chairman Ben Bernanke on Tuesday during a speech at the Brookings Institute. The comment certainly caught investors' attention, pushing the stock market to new highs for 2009 -- nearly 17% higher than January's levels.

That positive sentiment is just what investors need to profit from the next short-squeeze play. And right now's as good a chance as any to "squeeze the shorts."

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 their positions, 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.

With this in mind, Stockpickr has created its weekly portfolio of stocks with high short interest ratios and the catalysts to trigger a squeeze. Here's a look at this week's potential plays.

This week, we're taking a look at apparel short squeezes. Apparel companies got hit hard in 2008, largely because these consumer-sales-driven companies are so dependent on the discretionary income that dried up last year. All told, apparel stocks fell 45% -- nearly 11% worse than the rest of the market -- during the last calendar year.