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Stocks Under $10 with 50-100% upside potential - 14 days FREE!

10 Stocks With Huge Rebound Potential

Blue Nile

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One heavily shorted stock that's been beaten down big during the recent market malaise is Blue Nile (NILE), which with its subsidiaries operates as an online retailer of diamonds and fine jewelry worldwide. In the past three months, this stock has dropped over 16%, and so far in 2011, it's down over 24%.

Blue Nile has a market cap of $630 million and an enterprise value of $568 million. The stock isn't cheap, trading at 45 times trailing earnings and 34 times forward earnings. Blue Nile is cash-rich, with $79 million in cash on its balance sheet and very little debt.

One of the biggest reasons that I love Blue Nile as a heavily shorted rebound play is that one of the greatest traders in the world recently accumulated a big stake in the stock. Steven Cohen's SAC Capital hedge fund disclosed on May 12 a 6.7% stake in NILE, or a position of 981,348 shares. Cohen is a master of getting in early on stocks that have the potential for large short squeezes. He did just that not so long ago in OpenTable (OPEN) and Netflix (NFLX) before both of those stocks ripped the heads of the short-sellers.

From a technical standpoint, shares of Blue Nile have dropped big recently from $59 to a low of $43.30 a share. I now want to watch for the stock to find some buying support between $43 and its double-bottom support zone at around $41 a share. These are the levels I am watching for this stock to possible form a bottom and end its downtrend. If the stock were to break below $40.70, I would take off of my short squeeze radar for now.

Blue Nile, one of TheStreet Ratings' top-rated Internet catalog and retail stocks, is a favorite target of the short-sellers. The current short interest as a percentage of the float for NILE is an extremlet5y large 35%. This stock doesn't have a big float either, with only 14.44 million shares available for trading. If you see NILE end its downtrend around those prices I mentioned, then look to get in with Cohen and ride the short squeeze higher.

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