BALTIMORE (Stockpickr) -- It's no secret that the fundamental attributes all investors hope for at earnings season are the bane of the short-sellers. After all, short-sellers are hoping for an event that will trigger share prices to fall. But what happens when the shorts stack up against a highly profitable business? In some cases, it's the perfect storm for a sort squeeze -- and a potentially lucrative time for long-side investors who hold on for the ride.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.
Financial advisory firm Greenhill ( GHL) may not have the name recognition of the Wall Street giants that it competes with for business, but the company has managed to carve out a highly profitable niche nonetheless. In 2009, Greenhill saw nearly 24% of total revenue flow into net income.Still, that hasn't kept short-sellers from betting against the company, particularly after the "investment bank" moniker attracted the ire of Main Street investors in the last couple of years. The company's short interest ratio currently sits at 9.7. Greenhill focuses on providing financial advice for clients undertaking M&A transactions, restructurings, and other corporate actions. To clients, one of the company's biggest selling points is its small size - without the intertwined financial activities of a larger investment bank, Greenhill avoids conflicts of interest and maintains a competitive advantage. With 2010's heightened merger-and-acquisition environment, this company could see significantly higher profits in the coming year. One fund that's hoping for just that result is the Morgan Stanley Special Growth Fund (MSSGX), which also holds stakes in P.F. Chang's ( PFCB) and MSCI ( MXB).
Another highly profitable financial play that's seeing strong short interest right now is WestAmerica Bancorp ( WABC), a $1.72 billion California-based regional bank. Like many regional banks, WestAmerica saw its stock get rocked in 2008 despite the fact that the company maintained a relatively conservative loan book and maintained double-digit margins throughout the meltdown on Wall Street. Right now, the company's short interest ratio sits at 25.2.The biggest black cloud for WestAmerica right now is California itself. With real estate in the Golden State still far from recovered, the bank's borrowers may be able to pay on their mortgages still, but many are still under water. And with limited growth opportunities right now, investors shouldn't expect to see huge revenue growth. But with a decent dividend yield and colossal net ratios, as more investors become aware of this small bank's prowess, shorts should get shaken out in kind. Among WestAmerica's owners is the Schroder U.S. Opportunities Fund (SCUIX), which holds Morninstar's coveted five-star rating. Other Schroder holdings include Lazard ( LAZ) and Gartner ( IT).
Shares of small-cap REIT Alexander's ( ALX) saw a similar slide to this week's other short-squeeze plays back in 2008, as real estate nosedived alongside the REIT's portfolio. But that didn't stop Alexander's from maintaining double-digit margins in 2008 -- and 59% margins last year. Still, investors have yet to be impressed with the company's performance, pushing the stock's short interest ratio to 16.2.That's been due in part to the company's focus on the New York City metro area, a region that's been hit particularly hard in the wake of the real estate bubble. But as the company's holdings rebound alongside the market in 2010, its investors should see their patience rewarded. Those investors include the Baron Asset Fund (BARAX), an all-cap long term fund. Other positions in the fund's 69 stock portfolio include Charles Schwab ( SCHW) and Tiffany ( TIF). For the rest of this week's short-squeeze opportunities, including Ebix ( EBIX) and Mediacom Communications ( MCCC), check out the High Profit Margin 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.