By Jonas ElmerrajiBALTIMORE (Stockpickr) -- Riddled with debt, delivering mounting losses, and struggling to stay in business -- all factors that short--sellers salivate over when looking for a stock to bet against. But what happens when short-selling is predicated on product speculation instead of fundamental flaws?

In that case, you've got the potential for a short squeeze on your hands.

This week, we're looking at that exact situation, honing in on stocks that sport debt-free balance sheets in spite of heavy shorting. The implications of a short squeeze are pretty serious for shareholders. In case you're not familiar, 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.

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Naturally, these plays aren't without their blemishes -- there's a reason that these stocks are being heavily shorted. And a solid balance sheet is hardly the only factor that investors should consider. But for investors looking for exposure to a speculative play with a beefier risk/reward tradeoff, these could be powerful upside plays for the coming year.

With that, here's a look at heavily shorted debt-free stocks that could get squeezed higher.


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GPS giant Garmin ( GRMN) is facing stiff shorting despite a lack of debt and strong stock performance in 2011 -- already this year, shares of the firm have rallied more than 12%. Even so, short-sellers have taken a large position against Garmin. At present, the firm sports a short ratio of 9.2, which means it would take nearly two weeks of buying at current volume levels for shorts to cover their positions.

Garmin is one of the largest manufacturers of GPS devices in the world -- and the only firm that has a foothold on so many niches of the industry. With exposure to automotive, marine, aviation and recreational GPS users, Garmin supplies everything from joggers' trip computers to the complex moving-map avionics seen in state-of-the-art aircraft. And the company is leveraging its R&D spending to make new strides across all of its products.

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Some of those strides include the new Garmin G2000 flight deck, the first avionics suite with touch-screen capabilities. Other, less successful ventures include the ill-fated Nuvifone. Ultimately, though, Garmin's singular focus on GPS technology means that elements from all its product lines, successful or not, can be used in future offerings. For that reason, the company should continue to be ahead of its peers on the development curve.

With nearly $2 billion in cash and enviable cash-flow-generation abilities, a squeeze in Garmin could spark considerable interest in shares.

FactSet Research Systems

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As a major supplier of financial and economic data and analysis to the investment industry, it should come as no surprise that investors have been taking positions against FactSet Research Systems ( FDS - Get Report). With the post-2008 shakeups that have taken place industry-wide, firms such as FactSet have seen their customer bases contract -- and seen competition ramp up from standard bearer firms such as Bloomberg.

Still, FactSet's unique positioning makes it worth a second look right now.

Research tools from FactSet are used by everyone from investment managers to research analysts to analyze industries, companies and portfolios. As a result, the firm enjoys premium pricing for its product and recurring revenues as investment professionals re-up their subscriptions to the service. Those are two factors that help contribute to FactSet's deep margins -- and they're factors that investors should be cognizant of right now.

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Because of the sheer size of FactSet's installed base, the company doesn't face too much risk around its income-generation abilities. After all, while competition is fierce in the industry, it's important to remember that high-end data subscriptions aren't mutually exclusive and most investment managers want as much data from different sources as they can lay their hands on.

With a short ratio of 10.3, FactSet's facing stiff shorting right now -- all the more reason for long-side investors to take an interest in shares.

Mindray Medical International Limited

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Chinese medical device maker Mindray Medical International Limited ( MR - Get Report) is another debt-free stock that's facing heavy shorting right now. With a short ratio of 28.7, it would take more than a month for short-sellers to wind out their positions at current volume levels. As a result, it's worth noting that any whiffs of a short squeeze will likely send shares of Mindray Medical considerably higher.

Mindray Medical's devices are used for patient monitoring and life support, diagnostics, and medical imaging; three high-priced product lines where new technological advances are the deciding factor for hospitals. At the same time, Mindray Medical has been working on building its business in rural, outdated hospitals where new medical infrastructure is needed and staff can instantly transition to the firm's next-gen devices.

To be sure, the challenges that Mindray Medical faces right now are tough. The medical device market is incredibly competitive right now, and Western hospitals are likely to be reticent about turning to anything but the most well-established brands. Mindray will need to build its brand recognition if it wants to penetrate this lucrative market.

One big bullish bet on Mindray comes from Robert Karr's Joho Capital -- the stock comprises 3.5% of the total portfolio as of the most recently reported period.


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Industrial and construction supply firm Fastenal ( FAST - Get Report) has built itself an enviable business, providing a catalog of more than 580,000 fasteners, tools and building supplies to construction firms and maintenance departments worldwide. With around 2,400 sales locations, the company's distribution network is entrenched, and customers know who to turn to when they're in need of a specific item.

Even so, short-sellers have been latching onto the construction angle for Fastenal, building up a short ratio of 12 in shares.

But that short interest may be overblown. For starters, even though Fastenal's exposure to the construction business resulted in an earnings slump in fiscal 2009, the company has managed to get revenues back on track to overtake the $2.34 billion sales highs seen back in 2008. Double-digit margins are a big factor in Fastenal's recovery. Because the firm generates substantial cash from its efficient operations, management is able to return value to shareholders in the form of dividends and share buybacks, two strategies that have a direct impact on shareholder returns.

With shares already up nearly 10% in 2011, investors looking to take advantage of short seller-induced mispricings should take a look at Fastenal.

On the long side of Fastenal is Steven Cohen's SAC Capital, which reported a 1.3 million-share position in the stock as of the most recent period.


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Last up this week is footwear retailer DSW ( DSW), the company that owns and operates 310 of its namesake stores in 39 states. DSW has built an impressive business by eschewing the traditional mall shoe store route in favor of building big box stores that sell high-end shoes at lower prices than traditional competitors can muster.

Because of its unique store setup, fixed costs are comparatively low for DSW, allowing the company to focus on product price and ensuring reasonable levels of profitability even when sales volumes slump for economic reasons.

Increased focus on DSW's Web sales initiatives should bode well for the firm's top line, though I suspect sales will largely be concentrated among those who are already DSW Rewards shoppers. That said, any new avenues for growth are worth pursuing right now, particularly as management undertakes a more conservative capital deployment plan, limiting growth to organic consumer spending hikes rather than an expansion of the firm's geographic footprint.

With a short interest ratio of 15.8, it would take more than three weeks for short sellers to cover their positions at current volume levels.

To see these plays in action, check out the Debt-Free 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.


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At the time of publication, author had no positions in stocks mentioned.

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