NEW YORK (TheStreet) -- Shares of companies that investors are betting will fall, such as coupon seller Groupon (GRPN) and online travel-deals company Travelzoo (TZOO), may get a pop if they exceed analysts' expectations for earnings in the first quarter.
A so-called short squeeze, in which investors betting on stock-price declines buy back the shares if they rise, is a common occurrence with companies with a high short-to-cover ratio. Skullcandy (SKUL), a maker of headphones and other audio accessories, has a short-to-cover ratio of 28.1. That ratio indicates how many days, based on average daily volume, it would take all of the shorts to cover their shares and buy them back.
Company earnings have slowed, and analysts expect an increase of only 0.9% for the benchmark S&P 500, according to Sam Stovall, chief equity strategist at S&P Capital IQ. That heightens the probability of short squeezes, as investors grow more pessimistic on equities, in particular those they think will fare worse than their peers.There are several scenarios for a short squeeze, including seasonality, but with earnings season upon us, strong earnings and solid guidance could lead these four companies higher. Groupon Groupon has been one of the most controversial names since going public in November 2011. As of the end of March, 23.3 million shares were held short. The stock has a 11.5 short-to-cover ratio, according to Nasdaq.com. Plagued by accounting issues since going public, shares have lost 52% of their value since they started trading, and 39% this year. Groupon recently restated fourth-quarter earnings, citing higher-priced deals. The company's auditor, Ernst & Young said it found "material weaknesses" in its internal controls. The Chicago-based daily deals company did reiterate its first-quarter guidance, expecting between $510 million and $550 million in revenue, and income from operations of $15 million to $35 million. Stifel Nicolaus analyst Jordan Rohan notes that third-party data suggests that January was a mediocre month for Groupon, but February was very strong. "Travel deals were one of the key factors driving a strong billings month in February," Rohan wrote in his report. He rates Groupon shares "sell." Groupon is set to report earnings on May 14. Analysts polled by Thomson Reuters are looking for earnings of 1 cent per share on $530.82 million in revenue.
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