BALTIMORE ( Stockpickr) -- Investors have always had a love/hate relationship with so-called "sin stocks" -- companies that operate businesses that some consider morally dubious -- but whichever side of the fence you're on, this week's short-squeeze opportunities could present significant gain potential.

But before we get into those, let's cover the basics. Sin stocks include industries such as tobacco, gambling and alcohol -- even defense contractors fall into this category. Socially conscious investing has become increasingly popular in the last few years, as new mutual funds with specially vetted investments popped up on the scene. These funds, which include the Ave Maria Catholic Values Fund (AVEMX) and the Ariel Fund (ARGFX), only invest in companies that meet certain ethical guidelines.

But sin stocks have their fans as well. With traditionally strong margins, resilience in recessions, and highly marketable products, sin stocks have garnered enough attention to prompt institutional funds of their own, such as the Vice Fund. Today, we'll take a look at five sin stocks that have palpable short-squeeze potential.

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.

Each week, we create a portfolio of stocks with high short interest ratios and the catalysts to trigger a squeeze. Here's a look at this week's potential plays.

Monarch Casino & Resort ( MCRI) is a small-cap stock that owns and operates Reno, Nevada's Atlantis Casino Resort Spa, a property with 61,000 square feet of casino floor and nearly 1,000 guest rooms. Monarch has been getting quite a bit of investor attention lately -- and not the good kind. Short-sellers have pushed the stock's short ratio to 14.1. At that level, it would take nearly three trading weeks for short-sellers to cover their stakes.

While Monarch has seen tough times lately alongside the rest of the gaming industry, the small company has managed to maintain its profitability as the recession tapers off. And Monarch also boasts one of the strongest returns on assets in the small-cap casino segment. With a manageable debt load and an uptick in consumer travel spending, this stock should be able to shake out its demons and see higher ground in 2010.

One fund that's counting on that is the FBR Small-Cap Fund (FBRVX), which also owns stakes in Morningstar ( MORN) and Charles Schwab ( SCHW).

Cigarette maker Vector Group ( VGR) markets tobacco products to smokers through its Liggett and Vector Tobacco subsidiaries. Currently, the stock has a short interest ratio of 23.

But the company is far from underperforming; Vector has managed to increase its sales more than 58% in the last three years, steadily increasing its annual dividend payouts to shareholders along the way. At present, the company's dividend yield sits at a staggering 10.06%.

It's no wonder then that Vector caught the attention of the WisdomTree Small-Cap Dividend ETF (DES). The fund's other holdings include F.N.B. ( FNB) and United Bankshares ( UBSI).

Earlier this week Century Casinos ( CNTY) announced a surprise loss, exciting the short sellers that had pushed the stock's short ratio to 12.4. But there's more to that earnings story that just red ink.

The majority of Century's loss was thanks to a write down of $9 million on the company's Polish operations following an increase in gaming tax rates from 45% to 50%. That seemingly small increase in tax has a substantial effect on Century's business in Poland, which operates with relatively thin margins. But with the impact of Poland's operations on Century relatively small, and new analyst upgrades over Macau's gaming regulations, this stock should manage to rebound well.

Century is one of the many small-cap holdings in Lloyd I. Miller's portfolio. The investor holds insider stakes in a number of small OTC and listed stocks, including Youbet.com ( UBET) and ZiLOG ( ZILG).

For the rest of this week's short-squeeze opportunities, including Sturm Ruger ( RGR) and Craft Brewers Alliance ( HOOK), check out the Sin Stock 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.

Scott Rothbort is answering questions on Stockpickr Answers today.

RELATED LINKS:



Follow Stockpickr on Twitter and become a fan on Facebook.
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.