Squeezing the Shorts: Apparel Stocks
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By Jonas Elmerraji
BALTIMORE (
) -- The recession is "very likely over," claimed
Fed
Chairman Ben Bernanke on Tuesday during a speech at the Brookings Institute. The comment certainly caught investors' attention, pushing the stock market to new highs for 2009 -- nearly 17% higher than January's levels.
That positive sentiment is just what investors need to profit from the next short-squeeze play. And right now's as good a chance as any to "squeeze the shorts."
A short squeeze is the buying frenzy that ensues when a heavily shorted company starts to look attractive again to investors. As more and more of the short investors buy shares to cover their positions, share prices skyrocket. Almost anything can trigger a short squeeze: trumping earnings expectations, winning a lawsuit, unveiling a new product, even announcing a management change.
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.
With this in mind, Stockpickr has created its weekly portfolio of stocks with high short interest ratios and the catalysts to trigger a squeeze. Here's a look at
.
This week, we're taking a look at apparel short squeezes. Apparel companies got hit hard in 2008, largely because these consumer-sales-driven companies are so dependent on the discretionary income that dried up last year. All told, apparel stocks fell 45% -- nearly 11% worse than the rest of the market -- during the last calendar year.
But those tough times for apparel stocks are coming to a close. In the last nine months, apparel companies have seen their market values increase by nearly 40%, eclipsing the market at large and winning back some much-deserved ground for investors who held out. Even with the apparel industry's apparent comeback, however, the short-sellers have held positions in many of these stocks, hoping to see apparel fall back down on the first hints of economic trouble.
First on the list is
Luxottica Group
(LUX)
, a company that designs and manufactures luxury, sports and fashion eyewear under a number of different brands. While Luxottica took a financial hit along with the rest of the industry, the company has bounced back with a vengeance, growing net income by 198% in the last four quarter and pushing the company's share price up 42% since January. Still, with a short interest ratio of 27.4, it's clear that the short-sellers continue to target this stock.
The
is bullish on this stock, however. The fund owns more than 18 million shares of Luxottica, as well as stakes in
Kroger
(KR) - Get Report
, which has a short ratio of 1.2, and
Altria
(MO) - Get Report
, with a short ratio of 3.8.
New earnings numbers in October should help boost Luxottica's share price and spark the potential for a squeeze.
Under Armour
(UA) - Get Report
is one of the hottest sportswear companies right now. Started in 1996 by a former University of Maryland football player, this Baltimore-based company stands out because of its recent entry into new markets such as footwear and eyewear. And with a short interest ratio of 16.1, it's clear that short-sellers want to see this stock tumble.
With this week's upgrade of Under Armour to neutral and with increased attention during football season, this stock should continue to impress investors, who have watched it climb nearly 20% already this year. Among them is the
T. Rowe Price New Horizons Fund
, a fund rated four stars by Morningstar that counts
Coventry Health Care
( CVH), with a 2.3 short ratio, and
Global Payments
(GPN) - Get Report
, with a 3.8 short ratio, among its other holdings.
For more potential short-squeeze opportunities, check out the
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 any stocks mentioned.
Jonas Elmerraji, based out of Baltimore, 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.
Stockpickr is a wholly owned subsidiary of TheStreet.com.
At the time of publication, author had no positions in any stocks mentioned.
Jonas Elmerraji, based out of Baltimore, 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.
