Squeezing the Shorts: Bank Stocks

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By Jonas Elmerraji

BALTIMORE (TheStreet) -- It's no surprise that investors have been wary of financial stocks lately. After all, since 2007 we've seen major financial stocks such as Bear Stearns and Lehman Brothers melt down, shares of stalwart banks such as Citigroup(C Quote) tumble catastrophically, and rumors of big investment firms such as Goldman Sachs(GS Quote) controlling the market through program trading.

There are plenty of reasons to stay away from the financial sector, but there's an even bigger reason to look at just a few key financial names: their huge short squeeze potential.

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, including trumping earnings expectations, winning a lawsuit, unveiling a new product and 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 banking stocks with high short interest ratios and the catalysts to trigger a squeeze. Here's a look at this week's potential plays.