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TheStreet Open House

3 Nasdaq Short-Squeeze Stocks

Stocks in this article: NFLXOPENSHLDVECO

BALTIMORE ( Stockpickr) -- Short-sellers in Netflix (NFLX), a company that offers a subscription service streaming movies and TV episodes over the Internet and by mail, aren't happy customers of late.

The stock ripped to the upside Thursday by more than 14% after the company issued first-quarter guidance that handily beat Wall Street's expectations. Netflix said that first-quarter earnings may rise to $49 million to $62 million, with revenue of $684 million to $706 million. Wall Street projections were for a profit of $46.5 million on sales of $677.80 million.

Make no mistake about it: The great fundamental report from Netflix is only part of the story of why the stock is on fire. The rest is due to the short-sellers, who are fighting the trend and getting hammered on their bearish bets. The current short interest as a percentage of the float for Netflix sits at around 23%. The stock is now trading at all-time highs because of the short squeeze the bears have created by betting against a company that continues to report solid results.

There are even some famous investors short this name, including Whitney Tilson, who have pushed the idea that shorting Netflix due to its high valuation is a viable investment strategy. Netflix currently trades at around 79 times future earnings. The problem with this thesis is that nobody knows when the market will decide to care about the valuation, so being short can be a painful endeavor.

Related: Rocket Stocks for the Week

What's even more important to know about Netflix is that the stock is in a ridiculous uptrend and the fundamentals continue to support higher prices. One of the worst ideas for any trader is to be short a stock whose fundamentals remain strong, even if the valuation is a bit stretched. Investors who decided to short Netflix solely off of valuation are learning a very hard lesson in the markets: The probability of making money when you fight a trend just isn't very high.

I can make the exact same argument for the entire U.S. stock market right now. There are so many pundits out there who continue to push the idea that the market is overvalued and due for a major correction. Unfortunately for them, that correction still hasn't arrived, and the U.S. stock market continues to push higher. This is why I will continue to stress that market players need to stay with the trend until we see something concrete that suggests it might be near an end.

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