Short sellers are off and running as market declines tempt bets against stocks for the thrill of winning easy money. And for the last two-week reporting period, short interest on the S&P 500 stocks jumped by nearly 10% — the largest increase in shorts since April of 2014.
Our market outlook has degraded to short- and intermediate-term bearish, meaning that we think the increase in short interest is logical and the right move, but that doesn’t mean that the shorts aren’t wrong on some issues.
As many analysts will point out, there are almost always bullish stocks to be found. Sometimes you just have to look harder than others (this being one of those times). Our research suggests that short covering rallies occur in all market conditions, so it is always a good bet that you can find stocks to buy in any market by using our “Short Cover Rally” list.
The 10 stocks below are those that stand out as potential short interest candidates. Each of these stocks remain above their respective 50-day moving averages and have seen significant short interest increases of late.
Short Squeeze Stocks to Buy: Under Armour (UA)
Under Armour (UA) has been on a number of our bullish trading lists. The stock has been one of the stronger among the retail and consumer discretionary sectors, as the fundamental and technical backdrop for the stock remains strong.
Interest on UA jumped by 14%, taking the short interest ratio for the stock to its highest readings since July. This activity is important for the stock as UA will announce earnings in less than a month.
The last time that we saw an increase like this ahead of an earnings report, Under Armour saw a 17% rally in shares. We believe the relative strength leadership will continue, resulting in another short squeeze higher for UA.
Short Squeeze Stocks to Buy: Dean Foods (DF)
Many of the consumer food companies have had a tough road, as costs and consumption have spiraled downward in some of the areas. Dean Foods (DF) has been affected by this, but it has also adopted to the changing environment. As a result, the company’s shares have made a steady climb from their underperformance for much of 2014.
DF shares have been leading the market on a relative strength basis, despite growing short positions, a situation that is resulting in an upcoming covering rally.
For months, the shares have found a formidable opponent in the form of technical resistance at the $18 level. Recent attempts to stop DF shares at this price have been successful, but our models are suggesting that underlying long-term technical trendline support will prevail in a breakout above $18.
A break above $18 should trigger a short squeeze rally that has the potential to drive DF stock prices to a short-term target of $19 to $20. This upside expands higher on any broad market strength or positive news on the earnings front (to be announced on Nov. 9).
Short Squeeze Stocks to Buy: Smith & Wesson (SWHC)
Another slow and steady performer set for a short squeeze rally is Smith & Wesson (SWHC). Shares of this firearm manufacturer continue to climb as sales increase.
The latest data from the National Instant Criminal Background Check System from the FBI showed a 9% increase in checks from the previous month (12.6% year-over-year increase). The trend converts to more demand for firearms, a fundamental plus for SWHC.
Short sellers increased their positions in SWHC by 13% over the past two weeks, despite a positive earnings report at the end of August, which also drove some analyst upgrades.
While the short interest ratio for SWHC is within the lower range of its readings over the past two years, strong technical and fundamental trends suggest that there is more room for the short interest to drive prices higher. Current support at the $16 level should result in a short-term rally that will drive prices back to the $19 level, an 11% pop in prices.
As of this writing, Johnson Research Group did not hold a position in any of the aforementioned securities.