Debt-Free Short-Squeeze Opportunities

These heavily shorted stocks, including Garmin, could surge higher on any positive catalyst.
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BALTIMORE (Stockpickr) -- Debt: It's a four-letter word on Wall Street, and for good reason. High debt loads can shred thin profit margins -- particularly in a tough economy. In 2008, with credit harder to come by, many investors saw their debt-ridden stock picks punished with tumbling share prices. Debt-free stocks, on the other hand, often offer compelling investment cases -- especially when a short squeeze is involved.

A short squeeze is the buying frenzy that ensues when a heavily shorted stock starts to look attractive again to investors, causing 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 estimates 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.

Today, we're focusing on highly shorted stocks that are devoid of long-term debt on their balance sheets. Here's a look at

this week's potential plays

.

Industrial tool and supply wholesaler

Fastenal

(FAST) - Get Report

is having a strong week thanks to solid first quarter earnings numbers released yesterday. It's no surprise why Fastenal has seen its fair share of short sellers in the last couple of years - as a key supplier of industrial supplies, an overwhelming economic downturn has taken a huge bite out of the company's business. But shares have been rallying for more than 18 months now, and they could break even higher ground by the end of 2010.

Fastenal's shares have already rocketed nearly 40% in 2010, leading some analysts to worry that shares are losing the value proposition that they once offered. Still, strong economic tailwinds right now in the North American manufacturing segment look to boost the company's volume this year, a factor that materially increased Fastenal's value as a fundamental trade. And with a short ratio of 16.35 right now, there's plenty of short interest to shake out on improving numbers.

One fund that's hoping Fastenal will keep up its momentum in 2010 is

Baron Partners

(BPTRX). In addition to Fastenal, the $1.4 billion mid-cap growth fund also owns stakes in

Schwab

(SCHW) - Get Report

and

Dick's Sporting Goods

(DKS) - Get Report

.

Navigation giant

Garmin

(GRMN) - Get Report

delivered a $1.50-per-share dividend yesterday, a payout that represents a 4.12% dividend yield on top of the stock's lack of debt. Still, that hasn't kept short-sellers from betting against Garmin; shares currently sport a short ratio of 12.68.

Garmin is a leader in the GPS arena, not just in sales numbers but also in innovation. With significant R&D dollars pouring in to the company's advanced product lines, Garmin's valuable IP should start delivering rewards in the coming years.

>> Who Owns Garmin?: SAC Capital

Although Garmin's most well-known products are found in its consumer navigation lineup, the company is also a leader in aviation, recreational and maritime navigation -- more sophisticated applications that traditionally yield higher margins that the commodity-like automobile navigation units.

The company needs to be careful where it spends its development dollars; with marginally successful products such as the nuvifone under its belt, a renewed focus on high dollar systems (such as the G1000 glass cockpit system offered in general aviation aircraft) will be a sustainable shift in Garmin's product mix.

Among Garmin's biggest institutional owners is the

Columbia Technology Fund

(CTCAX), which also owns positions in

Apple

(AAPL) - Get Report

and

Priceline.com

(PCLN)

.

As pharmaceutical companies attempt to slash expensive research costs amid health care reform uncertainty on the hill, expect contract research firms like

Covance

(CVD)

to reap the benefits.

Covance, which provides a range of drug development and laboratory testing services to clients in the pharma, biotech and agrochem industries, may have macroeconomic fundamentals aligned with it now, but that wasn't always the case. Trimmed drug development budgets in the last few years have pushed the company's short ratio to 14.93 -- but that could soon change.

One of the most immediate-term catalysts for an upward pop in the company's shares is a first-quarter earnings release slated for April 18. The earnings call and the Management's Discussion & Analysis section of the forthcoming 10-Q should provide some guidance on how the current environment will impact sales in 2010.

Among those rooting for Covance is

The Baron Asset Fund

(BARAX), a $2.9 billion growth fund that hold a four-star rating from Morningstar. In addition to a million share stake in the laboratory testing company, the fund owns positions in

Idexx Labs

(IDXX) - Get Report

and

Tiffany

(TIF) - Get Report

.

For the rest of this week's short-squeeze opportunities, including

Strayer Education

(STRA) - Get Report

and

Columbia Sportswear

(COLM) - Get Report

, check out the

Debt-Free Short-Squeeze portfolio

at Stockpickr.

And to find short-squeeze plays of your own, be sure to check out the

Stockpickr Answers

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.