Automotive Short Squeezes for 2010
BALTIMORE (Stockpickr) -- It's been an inauspicious few years for the auto industry. From bankruptcies at two of Detroit's Big Three automakers and a handful of suppliers to high-profile recalls at Toyota (TM) - Get Toyota Motor Corp. Report, auto investors have reason to be skeptical about a comeback in cars. But that's exactly why a few car stocks are worth watching right now. With credit starting to trickle to consumers again, scores of automotive stocks stand to benefit in a big way.
That's not all. With heavy shorting in place against some of the car industry's most well-known names, the potential for a short squeeze is palpable.
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.
Here's a look at
that have the potential to see a short squeeze in the mid-term.
>>>Also see: 5 Credit Card Stocks to Sell
Tesla Motors
was a household name well before its June IPO. The company, which manufactures high-performance electric production cars, had been grabbing headlines for years on the appeal of its hyped-up Tesla Roadster, a battery electric sports car produced at the company's California facilities. But shares have languished some since the company went public earlier this summer -- and shorts have been out in force, pushing Tesla's short interest ratio up to 9.4.
But there could be significant upside to this stock right now for speculative investors. Tesla's biggest detractor has been its price point; with an MSRP north of $100,000, this two-seater sits well above the means of most American consumers. But the company's next offering, the four-seat Model S, could be a much more feasible option. With prices set to start at just $49,000 when the car is released in 2012, the Model S is poised to compete with similarly equipped gas-powered luxury models.
While the company is burning cash quickly to fuel R&D costs and quick growth, the company does have some flexibility in beefier gross margins should the economy tumble again. Shareholders of the
(ACRNX) apparently agree; the fund is one of Tesla's largest institutional owners. Other fund positions include
Ametek
(AME) - Get AMETEK, Inc. Report
TheStreet Recommends
and
Donaldson
(DCI) - Get Donaldson Company, Inc. Report
.
>>>Also see: Automaker Investing for 2010
Car super-dealer
Penske Automotive Group
(PAG) - Get Penske Automotive Group, Inc. Report
may not be a vehicle manufacturer, but it nearly was not too long ago. The firm was set to purchase the ailing Saturn brand from General Motors until the deal fell apart last year over manufacturing concerns. Now back to its core business of selling cars, Penske is facing additional pressure from a slow auto market -- a factor that's helped push the company's short ratio to 13.6.
Saturn was one of Penske's only connections to General Motors and the rest of Detroit's automotive royalty; the dealer generates 95% of sales volume from import brands. And though investors are concerned that the company's income statement has been squeezed in the last year, management has focused on shoring up its balance sheet of late. That's a potentially good omen in this market; with car sales still fragile, focusing on the balance sheet, which requires longer lead times for capital intense firms, leaves the company in a stronger position if sales contract.
That's the hope of funds such as the
(RYPNX), which owns a stake in Penske. The fund's other positions include
Dillard's
(DDS) - Get Dillard's, Inc. Class A Report
and
Timken Company
(TKR) - Get Timken Company Report
.
>>>Also see: Electric Car Stocks
A turnaround in the freight business could present a growth catalyst for
Rush Enterprises
(RUSHA) - Get Rush Enterprises, Inc. Class A Report
, a truck and construction equipment retailer with a network of 50 dealerships and service centers across the Southern U.S. The company, which currently sports a short ratio of 18.1, could be a short squeeze candidate if that investment thesis plays out.
Rush has seen some incremental improvements in its top line numbers of late, as freight companies expand and update their fleets to meet demand for over-road shipping in 2010. In the last ten years, Rush has expanded its reach to include a wider range of trucking brands, as well as school bus and construction equipment dealerships. Though those moves have helped diversify Rush's balance sheet, they've proved unappealing in light of the recent troubles in the construction industry and municipal coffers.
But freight continues to be the driving force in Rush's share price - something that
are hoping for given their position in Rush shares. Some of the firm's other positions include
AT&T
and
UnitedHealth Group
(UNH) - Get UnitedHealth Group Incorporated Report
.
For the rest of this week's short-squeeze opportunities, including
Pep Boys
(PBY) - Get Prospect Capital Corporation 6.25 % Notes 2018-15.06.28 Report
and
Stoneridge
(SRI) - Get Stoneridge, Inc. Report
, check out the at
Automotive Stock Short-Squeeze portfolio
at Stockpickr.
And to find short-squeeze plays of your own, be sure to check out the
community for insights and investment ideas.
-- Written by Jonas Elmerraji in Baltimore.
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At the time of publication, author had no positions in stocks mentioned.
Jonas Elmerraji is the editor and portfolio manager of the Rhino Stock Report, a free investment advisory that returned 15% in 2008. He is a contributor to numerous financial outlets, including Forbes and Investopedia, and has been featured in Investor's Business Daily, in Consumer's Digest and on MSNBC.com.
