Squeezing the Shorts: Uptrending Stocks
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By Jonas Elmerraji
BALTIMORE (
) -- Sometimes there's little rhyme or reason to the way Wall Street operates. That's because in the stock market, trading activity sets prices, not logic. When astute investors grab for chances to profit from that disconnect, some pretty exciting profit opportunities can ensue. That's why this week, we're looking at
for short-squeeze potential.
In 2009, the market has certainly turned the tables on the massive selloff that took place just one year ago. In the trailing 10 months, the Dow Jones has rallied 13.8%, yet despite the upward momentum we're seeing from a technical perspective, short-sellers haven't let up on a select few stocks as they've gained in price.
Those stocks present a very interesting short-squeeze opportunity right now as the market -- and the majority of stocks along with it -- continues to climb.
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, including trumping earnings expectations, winning a lawsuit, unveiling a new product and 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 banking stocks with high short interest ratios and the catalysts to trigger a squeeze. Here's a look at
.
First up this week is
Ritchie Bros. Auctioneers
(RBA) - Get Report
, a 50-year-old auctioneer of industrial equipment that's seen a nearly 20% rise in value since the beginning of the year despite a short interest ratio of 30.29. As you'd expect, the reason for the heavy shorting is no surprise. With demand for industrial equipment waning in the wake of the credit crunch, share prices were slashed industry-wide, and it's unclear as of yet when equipment-buyers will go back to upgrading their assets.
Still, the case that short-sellers are making for this stock isn't necessarily as grim as it appears. For starters, RBA has an efficient business model with little to no inventory risk, which suggests that the company is well suited to weathering financial downturns better than others in the industry. Also, Ritchie Bros. uses a novel approach to collecting payments that essentially affords the company a two-week float of funds that it can collect interest on. This financial flexibility should prove valuable until credit loosens across the board.
A number of funds seem to agree with that synopsis, and institutional investors own 77% of RBA shares. One of those owners is the
(RTRIX), a fund with a four-star rating from Morningstar that focuses on investing in small- and micro-cap stocks that pay out dividends. It counts RBA as its biggest holding, and other positions include shoemaker
Wolverine World Wide
(WWW) - Get Report
, with a short ratio of 4.3, and clothing retailer
American Eagle Outfitters
(AEO) - Get Report
, with a short ratio of 1.4.
HNI
(HNI) - Get Report
is a provider of office furniture, stoves and fireplaces for dealers, consumers and wholesalers worldwide. Two consecutive losing quarters have helped push the company's short interest ratio to 23.07, but as with RBA, there's a silver lining in this stock.
In addition to a prolonged uptrend that's been in place since early 2009, HNI has been paring down its costs in order to counter market conditions that have taken a significant bite of the company's revenues. HNI managed to improve its margins from -3% in the second quarter to -0.36% in its latest quarterly release. If the company can manage a swing to profitability in its year-end financials, expect to see short-sellers squeezed out and long investors rewarded.
Other holders of this stock include the
Vanguard Total Stock Market Index Fund
(VTSMX), which also owns shares of larger stocks such as
Exxon Mobil
(XOM) - Get Report
and
Microsoft
(MSFT) - Get Report
.
For the rest of this week's short-squeeze opportunities, check out the
Uptrending Short Squeeze Plays
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 New York.
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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.
