Short sellers spent the month of September prepping for a decline in some areas of the market as cumulative short interest rose by 3%. According to our proprietary component weighted exchange-traded fund short interest ratios, the heaviest concentrations of shorts remain in the small cap and banking sectors, as the short sellers appear to expect more volatility from these areas of the market over the next month or two.
On a sector note, the relatively high level of short interest that has been focusing on the Regional Banking sector is indicative of a Wall of Worry situation that is likely to help many of the smaller regional bank stocks thrive, since slightly higher interest rates would help their balance sheet activity.
This makes the regional banking group a great sector for “smart contrarian” trades right now, as it is ripe with stocks that are seeing signs of overwhelming pessimism, despite strong technicals and fundamentals. This combination is usually bullish for a stock.
Focusing back on single stocks, the most recent filtering results from our database for short-squeeze candidates are in the table above, along with three standouts within the group.
The following are three short-squeeze stocks you should pay attention to this month.
Short Squeeze Stocks to Buy: Deere & Company (DE)
Short Interest Ratio: 11
Deere & Company (NYSE:DE) shares have been outpacing the market by more than two times the S&P 500’s performance for the year (the stock is trading 11% higher). More robust demand for the large machinery that DE produces has fed the fundamental story here, something the market hasn’t factored into prices or outlooks yet.
Short interest on Deere stock is at a staggering 11 times average daily volume, as the shares make their way higher. In addition, our sentiment screen shows that only 11% of the Wall Street analysts covering DE stock are giving it a buy recommendation. This leaves room for upgrades to help squeeze the price even higher.
Our models target a move back above $86 as a likely catalyst for the next short squeeze and a likely target of $92.
Short Squeeze Stocks to Buy: Nordstrom, Inc. (JWN)
Short Interest Ratio: 11
The retail sector has been performing very poorly as consumers are showing signs of fatigue. The results of this are that there are very few standouts in the sector, one of them being higher-end department store operator Nordstrom, Inc. (NYSE:JWN).
Despite a 12-month loss of 25%, JWN shares are catching-up with the S&P 500 and are outperforming the retail sector on a year-to-dated basis. This comes from a change of management and some improvements to the fundamental data, including a positive earnings surprise last quarter.
Short sellers have taken the current shares sold short on Nordstrom to its highest level in more than two years. The result is a short interest ratio for JWN that is now above 11 and ripe for a short squeeze rally.
Nordstrom stock has been consolidating at $52 since August and is heading into a seasonally strong period for retail stocks. A break above the $52 level should initiate a covering rally that will help fuel JWN stock to the $57 level.
Short Squeeze Stocks to Buy: XPO Logistics Inc (XPO)
Short Interest Ratio: 13
XPO Logistics Inc (NYSE:XPO) is one of the largest logistics companies providing supply chain solutions in the logistics and transportation segments. Revenue and earnings results reflect a strong operation and the fundamental driver behind the stock’s 34% year-to-date performance, leaving peer companies in the dust.
The Wall of Worry remains in place on XPO Logistics, as the short interest ratio for the stock is now over 13. Shorts have been more exposed with higher levels of bets against XPO stock over the last two years, but recent additions to short positions are putting shares in position for another squeeze higher.
XPO Logistics shares have consolidated around the $37 level since their last earnings report in early August. Now, XPO stock looks ready to break higher as momentum is beginning to build. With that, a break above the $37.50 mark is likely to get the shorts running into the market to cover positions and likely drive XPO Logistics shares above $39.00.
As of this writing, Johnson Research Group did not hold a position in any of the aforementioned securities.
