10 Stocks to Buy as Short Sellers Swarm

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage

NEW YORK ( Zenpenny) -- Human beings enjoy picking on others as long as it can be done with some measure of privacy. Internet forums of various sorts have proven this time and time again. How many times do you hear individuals being loving and understanding as opposed to angry and confrontational? The anonymity of the Internet gives human beings the power to avoid their greatest fear. That is the fear of direct, face-to-face confrontation where real thoughts are expressed with fluidity.

The financial markets can also serve as a venue for expressing our passion, as human beings, for anonymous aggression. This is after all a zero-sum game. For every dollar you make, somebody is on the other side of your trade losing a dollar. That Ferrari that your investment in Google bought you came at the expense of a guy who had his Ferrari repossessed by shorting Google.

Joy is bought and misery is sold on a daily basis. Unbeknownst to market participants, the investments you are making can become like a shove in the chest to a guy who is taking the opposite side of your trade. If we were to personify the markets it is nothing more than a Battle Royale: steel chairs, closed fists and mayhem on a minute-by-minute basis.

There is no group I enjoy picking on more than short sellers. It's not because I am opposed to short selling. I have sold short stocks many times in the past and will continue to do so. What makes brawling with short sellers so appealing is the fact that a majority of them are traders at heart. When any stock is dominated by traders, the footprints that stock tends to leave become all the more transparent. You can sniff out its intentions well before it gets to its destination.

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They will sell short into failed patterns and pile on as the stock continues to move lower. Weak markets make them more aggressive. A bearish liquor of sorts is passed amongst them. They literally swarm like an army of angry ants on a hapless caterpillar that has stumbled into their den.

And much like an army of ants will react to a group of kids pouring water on their den, short sellers will do the same once a stock reverses course and begins moving up. They literally scatter in each and every direction looking for cover. This causes explosive moves in a stock that would otherwise be impossible without the help of short sellers adding fuel to the upside by covering their positions.

For this reason, the list of stocks that aggressive traders or investors should get long must involve short sellers. It is your job to use their blind aggression to create substantial profits over short periods of time. You become the bully.

I outlined recently some concern I have for the possibility of downside in the markets over the next few weeks. With that in mind, it is never too early to begin looking for those stocks that have been the strongest during the most recent rally and have been attracting the watchful eye of short sellers, as exhibited by a greater than average short interest percentage.

All of the stocks listed below have been extraordinarily strong and are exhibiting a good deal of doubt with respect to their moves up. Short sellers will surely pile on as they fall, should the market decide to decline further. They should be on your list of prospective stocks to buy when and if the market does dip:
  • Autonation (AN)
  • Baidu (BIDU)
  • Berry Petroleum (BRY)
  • Changyou.com (CYOU)
  • 51job Inc. (JOBS)
  • Linkedin (LNKD)
  • Liquidity Services (LQDT)
  • Netflix (NFLX)
  • Pricesmart (PSMT)
  • Quality Systems (QSII)

Ten stocks, most of which are loved by the shorts and have caused them much pain over the past few months. Keep an eye on them, as they will make for fantastic short-term investment vehicles should they provide an opportunity to get in over the next few weeks or possibly months.
Ali Meshkati is founder of Zenpenny.com, a Web site focused on investing in restructurings and special situations in micro-cap and small-cap stocks. Prior to Zenpenny, he managed Trillian Capital Partners LP, a top-ranked macro hedge fund. He has been trading the financial markets since 1994, working as an adviser to both individual clients, as well as an institutional trader with Bank of America. He can be reached at meshkati78@gmail.com.