You often hear people talking about short-squeezes they witnessed during the Internet boom and how they either knew someone who got killed or made a killing.
At the time, it was more about momentum than it was about
short interest ratios. Who cared about that stuff anyway?, was the thought process in the late 90s. Fast forward to 2007, and you still have short-squeezes, but one must be more careful.
Each month I write a column on the latest potential short-squeezes. At Stockpickr, we identify stocks that exhibit both high short interest and some other bullish quality, such as insider buying or strong earnings. These stocks are compiled in the latest
We always ask, who knows more? The CEO and other insiders, or the random daytraders betting against the company?
There have been major battles in stocks like
this year, and there are many stocks we have seen recently that could be good candidates for a squeeze. But we will focus on three in this article.
provides weight management and fitness products and services in the U.S. The company recently announced solid second-quarter earnings but issued earnings expectations for the third quarter below Wall Street's estimates. The company did, however, raise its full-year guidance based on a better-than-expected performance for the first half of 2007.
"We were pleased with the solid growth in our core women's market and continued strength in revenue coming from our ex-customers," said President and Chief Executive Michael J. Hagan. "In addition, the growth in the men's and senior's market segments for the second quarter exceeded our expectations."
Shares took a nice hit as people focused on the third-quarter guidance. The company has a short-interest ratio north of 13, so it clearly has a target on its back.
So we have a company that raised full-year guidance and is still just trading at eight times cash flows. That is exactly the type of situation in which you could see a nice upward move with shorts taking cover. The next question we ask is do we have some other quality investors in the stock that would lend credibility to this thesis?
Right away we see that NutriSystem is a component of the
. This ETF focuses on the stocks that have demonstrated strong relative strength compared with other stocks.
In other words, they had good charts over the past quarter. For other large components of the ETF, including
, go to the
page on Stockpickr.
It is also owned by
fund, which has returned 14% a year over the last five years. So we have a relatively cheap stock coming off a great quarter, with a strong chart and solid investors. Definitely something to keep an eye on if this starts to break out.
Next on the list is
( MFW). The company engages in the production and sale of licorice products, as well as the provision of checks and related products and direct marketing service. M&F is in the process of transitioning itself into a larger provider of check-printing services. The company recently completed its acquisition of John H. Harland Co. for $1.7 billion. MFW is also controlled by billionaire financier
, who owns 38% of the company.
While it is unclear if Perelman, best known for his stake in
, and more recently in
, has made a ton of money for investors in his deals, he has certainly made a lot of money personally and this is his company.
But the first thing you may be asking is how can a company that is up over 100% year to date and 300% over the last 12 months still get squeezed? In taking a closer look, you will see that it still trades at just 14 times cash flow. And analysts believe the John H. Harland deal will be accretive and will improve cost-savings across the board. But that still hasn't kept the shorts away, as short interest has slowly been building up.
However, despite the fact that MFW shares recently hit an all-time high and are up over 300% in the past 12 months, in a
article in late April one well-known investor said there is still plenty of room for the stock to run.
Ben Silverman, director of research at InsiderScore.com, said that "people get scared wondering if they've missed the boat." But given that Perelman himself just bought an additional $12 million worth of MFW on April 25, people should take that as a signal that investors have not missed the boat and there is still long-term potential in this stock.
You have a stock with good momentum that has just closed an accretive acquisition, with a large insider still buying shares recently near all-time highs. And it's still relatively cheap. Again, not a bad setup, especially if shorts get nervous and start buying in their positions.
Another heavily shorted stock is
, which has a short ratio of 21 and 14% of the float shorted. Nabi makes and sells products to help with transplantation, infectious disease, nicotine addiction and hematology. The stock has negative earnings and a P/S of 2. The stock happens to be owned by the Los Angeles-based activist hedge fund,
, run by Bob Chapman. His hedge fund, which he ran on the side for a couple years, had a net return of 55% in 2004 and 61.9% in 2005.
Other stocks that Chapman owns are
, with a short ratio of 5, and
, with a short ratio of 9, which is in the business of making specialty papers such as tea bags, coffee filters, specialized envelopes, playing cards and pressure-sensitive postage stamps.
Nabi is also owned by
, another activist hedge fund founded by Daniel Loeb. The fund has had an average annual return of 28.9% since 1995.
Third Point also owns
, which has a short ratio of 6. Both of those activist funds are playing in this space and both seem to like Nabi. Could be worth a look.
For the rest of the short squeeze opportunities,
James Altucher is president of Stockpickr LLC, a wholly owned subsidiary of TheStreet.com and part of its network of Web properties, and a managing partner at Formula Capital, an alternative asset management firm that runs a fund of hedge funds. He is also a weekly columnist for
The Financial Times
and the author of
Trade Like a Hedge Fund
Trade Like Warren Buffett
. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Altucher appreciates your feedback;
to send him an email.
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