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TheStreet Open House

Apparel Stock Short-Squeeze Opportunities

BALTIMORE ( Stockpickr) -- When times get tough, apparel stocks are often among the first on the chopping block. That's because any contraction in discretionary consumer spending can have a dramatic effect on the bottom lines of firms that market and manufacture clothing.

But it's that relationship to consumer cash that makes apparel stocks an especially interesting play -- particularly when heavily shorted fashion names stand to benefit from a short squeeze.

A short squeeze is the buying frenzy that ensues when a heavily shorted stock starts to look attractive again to investors, causing short-sellers to cover their positions -- and share price to skyrocket. 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.

Related: 5 Stocks to Capture Bullish Sentiment

This isn't the first time we've looked to apparel stocks for short-squeeze opportunities -- we last explored this industry back in September 2010, targeting three stocks that were being unduly shorted in the face of otherwise impressive business fundamentals. Since then, those three plays have returned an average of 33.82% -- vs. 19.16% from the S&P 500.

We'll aim to achieve that once again in 2011 with a look at a handful of new heavily shorted apparel stocks for this year.

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