Buy These 3 Stocks, Then Let the Short Squeeze Do the Rest

by Johnson Research Group | October 16, 2013 8:52 am

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We’re excited about a number of battleground stocks right now, as earnings season often provides the perfect catalyst for a short squeeze … at least to those willing to tear through the data.

After a sizable increase in short interest during September, it appears the shorts moved to close their positions ahead of an anticipated agreement on the budget and debt ceiling. The decline in aggregate short interest means those companies that did see increases in short selling are battleground stocks for the bears ahead of what is expected to be an active earnings season.

As always, we dissect the biweekly short interest data in search of technically strong companies with unusually high short interest activity because our studies (and others’ studies) tell us that these stocks have a distinct tendency to outperform the market — often thanks to short squeezes.

The table above identifies 10 S&P 500 stocks currently on our short squeeze list given their respective short interest and technical trends. In each case, these stocks have a bullish score from our proprietary scoring system, indicating that they are likely to outperform the market — even without the added benefit of a short squeeze — over the next month of trading.

Here’s a closer look at three in particular that stand out:

Chesapeake Energy (CHK[1])

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Having emerged from the chaos that embroiled Chesapeake Energy stock through 2012, this oil and gas company is emerging as a relative strength leader worthy of the bulls’ attention.

CHK recently broke through the technically important $25 level — a move that garnered the attention of short sellers as we’ve seen short interest rise, indicating the bears are trying to call a top.

The problem with the shorts’ strategy is that the break above this price has also attracted technical buyers, as the stock has now returned better than 20% during the past three months. We could see a slight pullback to the $26 level, but expect to see technical support that will lead the stock higher, causing those shorts to throw in the towel and spark a short squeeze.

Garmin (GRMN[2])

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This blast from the past is making tracks again as Garmin shares have surged almost 30% during the past three months. Sure, smartphones might have taken some market share from the GPS leader, but innovation and continued demand for specialized products like marine and other sporting goods items have put GRMN back on the map (pun absolutely intended).

Short sellers have spent the past month covering some of their positions, but the stock’s short interest ratio remains high at more than eight times Garmin’s average daily volume.

There’s some consolidation going on just below the $27 price, which appears to be offering an opportunity to enter GRMN before a break above that price forces another short squeeze that will move the stock higher.

Dollar Tree (DLTR[3])

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Dollar stores and other discounters have made a quiet move back to their 2012 highs. Remember, these companies became one of the most loved groups of the 2012 rally as investors loaded up on these shares as the recession continued — right into their top in July 2012.

Now, a year later, dollar stores are trading back at their highs, and the shorts and analyst community continue to doubt their future.

With Dollar Tree stock set to move to new highs, the short sellers have increased their bets against DLTR by 356%, sending the stock’s short interest ratio to new highs. Earnings aren’t announced until Nov. 21, reducing the likelihood that a soft report will reward these bears. The last three months of the year are historically strong for the market broadly and retail stocks specifically, increasing the odds of a DLTR short squeeze ahead of its earnings report.

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

Endnotes:
  1. CHK: http://studio-5.financialcontent.com/investplace/quote?Symbol=CHK
  2. GRMN: http://studio-5.financialcontent.com/investplace/quote?Symbol=GRMN
  3. DLTR: http://studio-5.financialcontent.com/investplace/quote?Symbol=DLTR

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