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.
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