The Russell 2000 is starting to lag the rest of the market as performance among these small-cap stocks is beginning to diverge. Since the beginning of the year, we’re seen correlation among these small caps drop, meaning that stock selection among the index is becoming even more critical.
Click to Enlarge The tide isn’t done rising, but it’s not lifting every boat in the harbor anymore.
Short interest has long been one of the best indicators for finding bullish trading opportunities among small-cap stocks for a couple of reasons. First, the short selling crowd tends to be more active on these names given their higher-volatility moves. Second, the average price of a Russell 2000 stock is $30 compared to $84 for S&P 500 companies. (Lower prices feel easier to short.)
As a result, small-cap stocks tend to see a lot more activity and thus provide more opportunities, especially when performance within the market begins to polarize as it is now.
The table above displays the top 15 small-cap short squeeze bulls as of the last reporting period. All of these companies match our proprietary short squeeze model profile as having a high potential for a short-term rally based on their strong technicals and growing short interest.
The following three small-cap stocks look the most appetizing.
Small-Cap Stocks That Could Burst: Ciena (CIEN)
Telecommunication and switching device companies are seeing a surge while network build-outs enjoy an increase in spending. Like many companies in the space, Ciena (CIEN) is now seeing positive trends in revenue and earnings, which in turn are driving strong technicals.
The short interest ratio for CIEN is now at its highest reading since February, when the stock was setting up for a nice rally. We expect to see a move above the $26 level act as a trigger for a new short-covering rally that should drive share prices north of $30 — a 20% move from today’s price.
Small-Cap Stocks That Could Burst: Nektar Therapeutics (NKTR)
Biotechnology stocks have had a great run, but there still are some diamonds in the rough, such as Nektar Therapeutics (NKTR).
NKTR shares are down 21% for the year, giving the shorts all kinds of reason to pile on with bearish bets … right?
Nektar has seen a 26% increase in short interest over the last reporting period as the company prepares to announce its quarterly earnings results (that report is coming Aug. 5). We also saw an increase in shorts ahead of the last quarter’s results, which blew estimates away and triggered a 20% rally in NKTR shares.
We like the odds of another short squeeze after next week’s earnings results, which would likely push shares north of the $15 level — a move of 25%.
Small-Cap Stocks That Could Burst: Infinera (INFN)
Networking companies continue to see fundamental improvements, especially those that deal with the cloud, such as Infinera (INFN). The company posted better-than-expected earnings results last week, helping the stock maintain support at its widely watched 50-day moving average.
The technical bounce now has INFN shares prepping to take out their all-time highs — a move that will get the shorts running to cover their losing positions. We’re triggering a move back above $24 as the catalyst for another 15% to 20% run higher in INFN shares, which targets the $27.50 mark.