5 Short Squeeze Stocks Ready to Pop in October

BALTIMORE ( Stockpickr) -- There are a lot of reasons to short stocks right now. You've probably already heard all the arguments against owning equities: they're expensive; there's the government shutdown to worry about, then there's another debt ceiling; they've already rallied so far so fast.

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But none of that matters. Fact is, the more individual investors hate stocks, the more you should be buying them.

Going back over the last decade, buying heavily shorted large and mid-cap stocks (the top two quartiles of all shortable stocks by market capitalization) would have beaten the S&P 500 by 9.28% each and every year. That's some material outperformance during a decade when decent returns were very hard to come by.

When I say that investors "hate" a stock, I'm talking about its short interest. A stock with a high level of shorting indicates that there are a lot of people willing to bet on a decline in its share price -- and not many willing to buy. Too much hate can spur a short squeeze, a buying frenzy that's triggered by shorts who need to cover their losing bets. And with the rally we've been since last November, you can probably guess that there are lots of losing open short bets.

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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.

It's worth noting, though, that market cap matters a lot -- short sellers tend to be right about smaller names, with micro-caps delivering negative returns when the same method was used.

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Today, we'll replicate the most lucrative side of this strategy with a look at five big-name stocks that short sellers are piled into right now. These stocks could be prime candidates for a short squeeze in 2013.

Gilead Sciences

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2013 has been a blockbuster year for Gilead Sciences ( GILD) -- shares of the $96 billion biopharmaceutical company have charged more than 70% higher since the start of the year. But that upward momentum hasn't kept short sellers at bay; it's only made them shout their value argument louder. As I write, GILD carries a short interest ratio of 10.01, indicating that it would take more than two weeks of buying pressure for short sellers to exit their bets against this stock.

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Gilead's business centers around creating and marketing drugs that fight infectious diseases, with a focus on HIV and hepatitis B and C. Gilead's HIV treatments are making waves in the health care field -- the all-in-one pill Atripla dramatically simplifies the daily regimen for HIV patients, for instance. The firm also made an $11 billion bet on treating hepatitis C through the acquisition of drug maker Pharmasset. That diversification should be welcome for investors in this concentrated stock.

While patent expirations are a concern for Gilead, the firm's keystone HIV patents don't start expiring until 2018, ample time for the firm to develop new formulations and to keep adding other diseases to its hit list. Financially, GILD is in solid shape in spite of its transformational acquisition efforts, with $3 billion in cash and investments largely offsetting a $7.3 billion debt load.

There's no question that Gilead isn't exactly cheap right now, but it's trajectory isn't showing any signs of slowing either.

Becton, Dickinson

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Becton, Dickinson ( BDX) is another health care name that investors hate this fall. Becton is the world's largest medical supply company, manufacturing and distributing surgical instruments such as needles, syringes and scalpels to facilities all over the world. With a short interest ratio of 12.59, it would take more than two weeks of buying pressure for shorts to get rid of their bets against this stock.

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Becton's biggest business is still in basic medical instruments, but the firm has been at work for years to grow its complex high-margin medical equipment (like oncology and pathology diagnostic devices) into a bigger piece of the revenue pie. Together, those two parts of BDX's business provide a very complementary whole -- the basics pay the bills and provide downside protection from a bumpy economy, while high-tech devices hold the promise for revenue growth and margin expansion. That's been a key to the year-over-year sales growth BDX has booked since the financial crisis.

The latest stage of "Obamacare" kicking off this week should usher in a big tailwind for BDX. Whatever your politics, there's no question that an aging baby boomer demographic with more government-mandated insurance is good for medical device sales. And with one of the most-trusted brands and most established distribution networks out there, Becton, Dickinson is uniquely positioned to take full advantage.

Earnings the first week of November could have short squeeze implications for this stock. Stay tuned.


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There's no avoiding death and taxes. California-based software firm Intuit ( INTU) is counting on at least half of that statement holding up.

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Intuit develops tools that help consumers and businesses figure out their finances. The firm's brands include tax preparation software TurboTax, and leading accounting titles Quicken and QuickBooks. Intuit's success in simplifying financials have established a major economic moat for the firm -- its software enjoy nearly 90% of the market share for tax prep and small business accounting software. And as the firm markets more services to its existing customer lists, it should continue to churn out growth.

Intuit benefits from extremely high switching costs. Because customers have years of detailed tax data stored through TurboTax, for example, they're a lot less likely to convert to a rival service -- even a free one. For businesses, services like payroll and payment processing tie in perfectly with QuickBooks. That means that switchers have to deal with enormous headaches to jump ship.

That domination shines through to INTU's balance sheet. Right now, the firm boasts $1.6 billion in cash and just $499 million in debt. While that hardly makes Intuit a deep value name, it protects the firm from a lot of downside risks. Just like Becton, Intuit isn't cheap right now. But if short sellers lose their patience, this name could be a textbook short squeeze: Right now, the firm has a short interest ratio of 11.82.


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One of Intuit's competitors is joining it on our list today. Paychex ( PAYX) is the second-largest payroll outsourcer in the world, taking care of the payroll paperwork for 500,000 small and medium business clients all over the globe. While the uneasy recovery in the jobs market has acted as a big black cloud over PAYX in the last five years, the firm is making it clear that its revenues are recovering faster than unemployment data dictate.

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In the past, Paychex has traditionally been a payroll company, providing services for business owners who wanted to simplify the process of getting employees paid and taxes sorted. But PAYX has unlocked a profitable niche in the HR outsourcing business, upselling everything from 401(k) record-keeping to workers' compensation administration to its existing customer Rolodex. As with Intuit, the high cost of switching and hard-to-find side services makes PAYX's customers extremely sticky.

One key revenue source for payroll outsourcers is float income, the interest income it earns by holding clients' cash until employees withdraw it. Obviously, record-low interest rates have hammered Paychex's ability to earn money on its massive float. But with low float revenues already priced into shares, any buoyancy in interest rates means that there's a sudden, big source of free money on tap down the road.

Right now, Paychex's short interest ratio sits at 12.84.

Chipotle Mexican Grill

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Short sellers just haven't learned their lesson from Chipotle Mexican Grill ( CMG). Shares of the $13 billion fast-casual restaurant chain have rallied more than 43% since the calendar flipped over to January, basically guaranteeing that anyone who bet against this perennially-hated stock this year is getting shellacked. But CMG's short interest ratio is still up at 10.61.

Chipotle operates more than 1,500 stores across the U.S. and Canada, with a smaller presence in the U.K. and France. While Chipotle's operations across the pond provide a solid testbed for a couple of exciting markets, the real growth story is still centered on North America right now. Chipotle estimates that it can still double its store count here at home before the market starts to get saturated, a fact that leaves a lot of room open overhead for growth. Despite stiff competition, Chipotle continues to offer a value proposition that customers want -- and its higher-quality positioning means that it's able to collect thick margins for its trouble.

Just as important as how fast Chipotle is growing is how it's paying for that growth. To date, Chipotle has almost exclusively used cash from operations to finance its new stores, providing the firm with a debt-free balance sheet and nearly $500 million in cash. That lack of leverage means that CMG can weather the next economic hiccup better than most restaurant names.

It also means that we could easily see a short squeeze in shares. Keep an eye on this one.

To see these short squeezes in action, check out this week's Short Squeezes portfolio on Stockpickr.

-- Written by Jonas Elmerraji in Baltimore.


Follow Stockpickr on Twitter and become a fan on Facebook.

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

Jonas Elmerraji, CMT, is a senior market analyst at Agora Financial in Baltimore and a contributor to
TheStreet . Before that, he managed a portfolio of stocks for an investment advisory returned 15% in 2008. He has been featured in Forbes , Investor's Business Daily , and on CNBC.com. Jonas holds a degree in financial economics from UMBC and the Chartered Market Technician designation.

Follow Jonas on Twitter @JonasElmerraji

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