The shorts continue to add to positions according to the latest release of short interest from the exchanges. The increase in short positions isn’t a huge surprise, though, given the growing feeling that another selloff could be in the short-term mix.
That said, a number of companies are maintaining excessive short positions despite outperforming the market. Naturally, these are the stocks that shoot right to the top of our list for potential short squeeze candidates.
A short squeeze is a bull’s best friend. These squeezes happen when investors who have gone short a stock decide their trade might be invalid (usually because the stock keeps moving higher against them).
Well, when these sellers become buyers, a virtuous cycle takes hold, and share prices can move quickly and sharply higher as they add to the already bullish flow of cash into that stock.
If you want to jump into such a cycle, consider one of the following three companies with unjustifiably high short interest.
Stocks to Buy With High Short Interest: Reynolds America Inc. (RAI)
Reynolds American, Inc. (NYSE:RAI) manufactures cigarettes and other tobacco products, including nicotine gum. The company’s stock has been on a tear since November, rallying 20% in a straight line upward. RAI earnings have bested expectations six out of the last eight quarters with year-over-year revenue growing at a 5% clip more recently.
However, the positive fundamentals and technical are lost on the short sellers, who have bid their positions up to a lofty 7.7 times of average daily volume while the stock is pressing to new highs.
With only 23% of the analysts covering the stock ranking RAI a “buy,” we expect to see some upgrades to the stock, which would turn the heat up on the short sellers. Look for RAI shares to squeeze toward $80 during the next few months.
Stocks to Buy With High Short Interest: AutoZone, Inc. (AZO)
Do-it-yourself is still the way for many to go as the tepid economy has auto owners willing to tinker in the driveway to save a few bucks over taking their car to the local mechanic. Both AutoZone, Inc. (NYSE:AZO) and O’Reilly Automotive Inc (NASDAQ:ORLY) have benefited from this trend, which we expect to continue.
Currently ranked a “strong buy” by our behavioral valuation model, both AZO and ORLY stand out as possible short squeeze candidates as their short interest ratios are 7.5 and 8, respectively. From a sentiment perspective, AZO is a stronger bullish candidate as the stock has only 33% of the analyst covering it ranking it a “buy,” which means there is more potential for upgrades, which would drive prices higher.
ORLY just delivered a positive earnings surprise in early February, boosting shares more than 10%. AZO is preparing its quarterly report for delivery on March 3, and given the similarities between O’Reilly and AutoZone, we believe that the stock will benefit from a healthy quarter. That should squeeze the shorts into the market as buyers looking to cover their positions.
Look for both AZO and ORLY to continue to outperform the S&P 500, but AZO is the stock to watch over the next few weeks for a potentially explosive move higher.
Stocks to Buy With High Short Interest: Waste Management, Inc. (WM)
Fresh off of its latest earnings report, Waste Management, Inc. (NYSE:WM) shares are on the move higher, but our research suggests that this is only the beginning of the move. The company just announced earnings results that were 8% better than expectations, their best in two years. In addition to the earnings beat, the company’s board raised its dividend 2.6% — a move that will keep it attractive in a rising-interest-rate environment.
The fundamental strength becomes more attractive when you consider how bearish the market is towards WM shares. Currently, 31% of the analysts covering the stock have it ranked a “buy,” meaning that there is a herd of potential buyers camping out in the “hold” camp. History tells us that continued strength and positive fundamentals will get these analysts to start upgrading, which will push prices higher.
We’re expecting the stock to surge higher after a short consolidation at the $54 level with a $60 target by early summer.
As of this writing, Johnson Research Group did not hold a position in any of the aforementioned securities.