5 Energy Stocks to Squeeze the Shorts

BALTIMORE (Stockpickr) -- With energy prices sitting near highs for most of 2011, energy stocks have proven a solid bet so far this year. While yesterday's selloff officially knocked the S&P 500 down to a loss since the first trading day of January, the energy sector has brought in positive returns of nearly 5%. Take out big-name energy stocks from the S&P, and the difference is even more striking.

Energy plays have long been a good way for investors to hedge their bets against the market. That's because their performance is so heavily predicated on commodity prices, which don't correlate strongly with the stock market. Energy names also tend to pay out respectable dividends -- providing returns to shareholders regardless of market sentiment. So when stocks are looking soft (as they are now), energy stocks can offer sought-after gain potential.

And some energy stocks are offering more gain potential than others right now.

You see, even though the energy sector has been performing at a high level this year, a handful of relatively high-profile energy stocks have had short-sellers piling into them -- creating a prime opportunity for a short squeeze this summer.

Related: 5 Technical Setups With Breakout Potential

Put simply, 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.

Naturally, these plays aren't without their blemishes -- there's a reason that these stocks are being heavily shorted. 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 five energy sector names that look like prime short-squeeze candidates right now.

Imperial Oil Limited

Content on this page requires a newer version of Adobe Flash Player.

Get Adobe Flash player

Canada-based Imperial Oil Limited ( IMO) is an integrated oil company that's a major player oil sands projects. The $36 billion company has some well-known backers: supermajor Exxon Mobil ( XOM) owns 70% of the firm, providing a considerable amount of operational know-how as a consequence. Still, short interest is concentrated against Imperial -- a short ratio of 16.3 means that it would take short-sellers more than three weeks to cover their positions at current volume levels.

Imperial has been a big beneficiary of the relatively high oil prices that have held steady throughout 2011; the firm has been ramping up its production capacity and bringing new projects online as a result of boosted margins. As an integrated oil producer, Imperial also has interests beyond the exploration business -- the firm owns four Canadian oil refineries as well as a petrochemical division.

While Imperial has been increasing its leverage to finance increased operations, the heftier debt load is easily justified given the net margins the firm is able to generate right now. As those projects flow to Imperial's balance sheet, short sellers may want to reduce their exposure to this stock.

Imperial is one of TheStreet Ratings' top-rated oil and gas stocks.

Kinder Morgan

Content on this page requires a newer version of Adobe Flash Player.

Get Adobe Flash player

Kinder Morgan ( KMI) enjoyed a high-profile IPO earlier this year, adding another play on Kinder Morgan Energy Partners ( KMP) to the marketplace. Put simply, KMI is a holding company that owns KMP's general partner as well as incentive distribution rights, and a sizable chunk of limited partner units. The result is a way to gain exposure to one of the income world's most popular energy transportation and storage MLPs.

In essence, KMI is a holding company that's just been designed to maximize distribution income. The firm's 4.31% dividend payout is a testament to that goal -- while that yield is dwarfed by KMP's hefty dividend yield, the favored nature of KMI's assets means that dividend growth should move faster at KMI.

Large, consistent dividend payouts are like kryptonite to short sellers, who are trying to bank of an income stock's inability to maintain its payouts to shareholders. That said, with analysts anticipating double-digit dividend growth for the foreseeable future in KMI, shorts look like they're on the wrong side of this stock. A short interest ratio of 15.8 means that it would take more than three weeks of buying pressure for shorts to close their positions at current volume levels.

KMI shows up on a recent list of 12 Stocks With Increasing Dividends.

First Solar

Content on this page requires a newer version of Adobe Flash Player.

Get Adobe Flash player

Bets against First Solar ( FSLR), on the other hand, have been panning out pretty well this year. Shares of the $10 billion solar stock have tumbled more than 11% year-to-date, as considerable economic and political stumbling blocks knocked the entire "green energy" industry down a peg. Solar stocks have been one of the most high-profile -- and hotly debated -- ways to get exposure to green energy plays, but the fad status they enjoyed following 2009's market bottom is long gone.

Even so, investors shouldn't be counting out the industry this year -- particularly First Solar. As one of the largest (and best capitalized) solar names, First Solar boasts low-cost manufacturing operations and a significant store of intellectual property that few of its smaller competitors can match. While solar demand in Europe (particularly Italy and Germany) is forecast to decline in 2011, Wall Street may be overemphasizing the amount of the decline. As traditional energy costs remain high, renewable alternatives like solar will continue to gain traction.

First Solar currently sports a short interest ratio of 13.4. The firm's second-quarter earnings announcement on Aug. 4 could be a potential short squeeze catalyst for this week.

First Solar shows up on a recent list of 10 Energy Stocks With Upside, and I highlighted it earlier in " 6 Earnings-Surprise Stock for Your Portfolio."

Tidewater

Content on this page requires a newer version of Adobe Flash Player.

Get Adobe Flash player

Offshore energy servicer Tidewater ( TDW) is a crucial part of life for oil rig companies -- the firm's 400 vessels provide everything from day-to-day supplies to oil rig transportation services to a worldwide list of energy clients. Not surprisingly, rising oil prices are a boon to servicers such as Tidewater; increased prices mean that new projects suddenly become economically viable, increasing demand for the services that the firm and its peers provide.

Because Tidewater earns the majority of its revenues overseas, the company could potentially diversify its revenue streams away from the U.S. dollar on relatively short notice, a potentially positive feature for any stock right now. Vastly decreased tax liabilities are another benefit of the company's international exposure.

Despite operating in a capital-intensive business, Tidewater sports a reasonably lean balance sheet. Investors should expect Tidewater to continue to operate at historically high levels as long as oil prices remain a hair's breadth away from the triple digits. Those positive attributes haven't spared the stock from the shorts: a short interest ratio of 10.5 means that it would take two full weeks of buying for short sellers to cover their positions.

>>Practice your stock trading strategies and win cash in our stock game.

TransAlta

Content on this page requires a newer version of Adobe Flash Player.

Get Adobe Flash player

But all of those short interest numbers pale in comparison to the sheer amount of shorting going on in shares of TransAlta ( TAC). With a current short interest ratio of 34.5, it would take almost two months of buying for shorts to close out their positions in this $5 billion energy utility. That makes this stock a prime short-squeeze candidate to watch right now.

TransAlta is an energy generation utility that owns an interesting mix of traditional coal and gas-fired power plants as well as more than 2,300 megawatts of renewable generation assets. To the firm's benefit, management has tied up the vast majority of its capacity in long-term contracts that lock in rates in advance and create consistent income generation for investors. To take advantage of improving rates, TransAlta has been adding onto its capacity, acquiring new generation assets as they become available at reasonable prices.

The strategy is paying off for shareholders as well. For now, the firm's growth strategy and impressive dividend payout have kept TransAlta's total returns positive this year, much to the chagrin of short sellers. Because of its high short interest ratio, this stock could move fast as shorts try to escape a rally.

TransAlta is one of the highest-yielding utility stocks.

To see this week's short squeezes in action, check out the Energy Stock Short Squeezes 2011 portfolio on Stockpickr.

-- Written by Jonas Elmerraji in Baltimore. 

RELATED LINKS:
 
 
 
 

Follow Stockpickr on Twitter and become a fan on Facebook.

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 MSNBC.com.

More from Investing

3 Best Investing Opportunities Right Now in Closed-End Funds

3 Best Investing Opportunities Right Now in Closed-End Funds

How Small-Cap Stocks Can Protect Your Portfolio From a Trade War

How Small-Cap Stocks Can Protect Your Portfolio From a Trade War

When Is It 'Worth It' to Work With a Financial Advisor?

When Is It 'Worth It' to Work With a Financial Advisor?

Amazon, Microsoft and Google Face Backlash over ICE, Military Deals

Amazon, Microsoft and Google Face Backlash over ICE, Military Deals

3 Great Stock Market Sectors Millennials Should Invest In

3 Great Stock Market Sectors Millennials Should Invest In