5 Potential Short-Squeeze Pops

by Chris Johnson | July 17, 2012 9:34 am

As every investor knows, few things can be more exciting as pinpointing a short list of stocks that are ready to pop, then seeing your research come to fruition. We’ve been in this business for a combined 30 years, and I can tell you that watching a stock’s technical picture in conjunction with its short-interest activity provides a reliable list of stocks that are ready to do just that — pop.

A short squeeze often occurs when the price of stock with a high short interest sees an increase in its demand as the stock breaks higher. The increase in demand often is attributed to short sellers being forced to buy shares to cover short positions that are moving against them. In cutting their losses, short sellers often add to demand by buying shares to cover short positions, causing the share price to further escalate temporarily. Remember: Being short a stock has unlimited downside potential as the shorted stock rallies; this means that these companies are more than likely to spawn buying interest from the shorts as their technical picture improves.

So, knowing that a short squeeze often is a good catalyst for short-term pops in stocks prices, we wanted to provide you with a list of companies that look ready to pop on potential short-covering rallies. The way we identify these companies is to look for companies that are in the midst of strong technical trends with relatively high short-interest ratios (the ratio of short interest to a stock’s average daily volume, or ADV).

We’ve put together a list of companies for you that have seen increases in short interest lately while the underlying stock has seen a bullish trend. In other words, this is a list of companies that short sellers have been betting against, despite their improving price patterns. The improving price pattern of these stocks means the short sellers are likely to get squeezed to the point that they are forced to close out their losing positions soon.

Let’s take a look at a few that we consider standouts in the list:

The REIT sectors of the market are becoming attractive to investors lately as signs that a long-term bottom in the real estate markets have started to emerge. In addition to the market-timing element, many REITs also carry large dividend yields — something that a lot of investors are on the hunt for given the low yields available in the fixed-income market.

Boston Properties (NYSE:BXP[1]) is an REIT that focuses on the ownership and development of office properties and parking facilities. The company’s dividend yield weighs in at about 2%, making it a little lower than average for the group. What BXP shares lack in dividend they have made up in returns, as the shares are up 11% year-to-date. The latest surge in BXP has the shares poised for a breakout above $110 — a break that certainly would get the shorts moving to cover their positions, currently at almost nine times the average daily volume. We like the stock to head toward $120 quickly on such a break.

Health Care REIT (NYSE:HCN[2]): The name says it all. HCN specializes in the planning, management and acquisition of health care real estate assets, including senior living communities, medical office buildings, inpatient and outpatient medical centers and life science facilities. The shares boast a hefty yield of almost 5% while returning more than 11% year-to-date, making this stock a “triple-threat performer” (fundamentally and technically attractive with a healthy yield). The shorts are waking up to the performance of this stock and covering their bets, breaking it through the $60 mark. We’re eying the $65 level as a near-term target.

Big Lots (NYSE:BIG[3]): Discount retailers like Big Lots have been a favorite for investors as these stocks flourished as consumers had been searching high and low for deals. Lately, BIG hasn’t been as well-liked as Ross Stores (NASDAQ:ROST[4]) or Dollar Tree (NASDAQ:DLTR[5]), but we still think the shorts might have the stock wrong lately, as the current short interest ratio registers a lofty reading of 7.6. The last time the short interest ratio for the stock was this high was late December 2011, just ahead of a breakout to $48 from $40. The shorts are going to get nervous really quickly when this stock starts heading toward $40 again. We expect to see a target of $42 over the near term, achieving a potential 10% gain.

CenturyLink (NYSE:CTL[6]): CenturyLink operates a network business lines including local and long-distance providers, broadband access, managed hosting and video services to consumers and businesses. As with many of the telecom companies, CTL posts an attractive dividend yield[7], in this case around 7%. Also, as with many telecom companies, CTL has seen a surge in buying interest lately as its shares are breaking through the $40 level. The jump in buying interest likely will send the short sellers back into the market as buyers to close their positions. The combination of high dividend yield and short covering will help the share price to our target of $45.

One name not on the list (because it’s not in the S&P 500) is Lumber Liquidators Holdings (NYSE:LL[8]). This small-cap company straddles two sectors that we’ve loved having exposure to: retail and homebuilders. Short sellers remain high on this retailer, despite the fact it is leaving the rest of the market behind. To date, LL has returned 91% (yes, as in just less than 100%) for the year. The unrelenting short sellers are likely to cover the current shorts, adding more buying pressure to the shares as they break to new all-time highs. Consider $40 a reasonable target for LL shares over the next three to five months.

Given the large amount of pessimism currently priced into the market, there are numerous other short-squeeze opportunities to be found. We will work to highlight other lists as they develop through the month to keep you up-to-date with this effective trade tool.

As of this writing, Chris Johnson did not hold a position in any of the aforementioned securities.

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