Not a Stockpickr member? Join the community today -- for free.By Jonas Elmerraji BALTIMORE ( TheStreet) -- It's no surprise that investors have been wary of financial stocks lately. After all, since 2007 we've seen major financial stocks such as Bear Stearns and Lehman Brothers melt down, shares of stalwart banks such as Citigroup ( C - Get Report) tumble catastrophically, and rumors of big investment firms such as Goldman Sachs ( GS - Get Report) controlling the market through program trading. There are plenty of reasons to stay away from the financial sector, but there's an even bigger reason to look at just a few key financial names: their huge short squeeze potential. 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 this week's potential plays.
This week is all about banks. That's because this sector, which already squeezed out many shorts at the beginning of 2009, is in the midst of a serious share-price comeback. And while the big names, such as Bank of America ( BAC - Get Report) and JPMorgan Chase ( JPM - Get Report), have been interesting for many investors, the smaller, more heavily shorted banks are where we're looking today. First up on our list is WestAmerica Bancorp ( WABC - Get Report), a regional bank with 86 offices throughout Northern and Central California. Investors have heavily shorted shares of this small-cap bank; its short interest ratio currently stands at 36.21. And there's certainly good reason for all of that downward pressure on the stock. For starters, WABC is heavily invested in California real estate, a market that many real estate analysts say is still yet to see a bottom for prices. With a long history of expensive charge-offs, this bank does face challenges going forward. But that's not to say it's a lost cause. For starters, WestAmerica offers industry-leading margins that should help the company cope with a few more quarters of rough and tumble real estate. Coupled with adequate loss reserves, this bank stock looks like a squeeze just waiting to happen. That's a sentiment that's shared by the T. Rowe Price Mid-Cap Value Fund (TRMCX), a four-star fund as rated by Morningstar. The fund also owns shares of Southwest Airlines ( LUV - Get Report), with a short ratio of just 2.7, and Discover Financial Services ( DFS - Get Report), with a short ratio of 1.2. Another stock that made this week's list is Royal Bank of Canada ( RY - Get Report), Canada's largest bank by assets, which has a short interest ratio of 20.58. While this stock has seen better days, shares have already rocketed 82% year-to-date, and with unmatched market positioning, the bank stands to better itself coming into the final quarter of 2009.
One of the bank's largest institutional owners is the Vanguard International Value Fund (VTRIX), which also owns shares of Vodafone ( VODPF) and Gazprom ( OGZPY). For more potential short-squeeze opportunities, check out the Banking Short-Squeeze Plays 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. Register for Stockpickr today!