Short sellers took the last half of November off as short interest on the S&P 500 only increased by one percent.
The small increase in short interest follows what has been a very active three-month period that has seen short sellers opening and closing positions faster than normal as traders react to volatile trading conditions that have turned the normally bullish fourth quarter on its ear.
As is usually the case, the short interest changes at the sector and stock level are seeing more dramatic changes as short sellers are making some very specific moves. For example, Apple Inc. (NASDAQ: AAPL) saw a 53% increase in short interest, as the market is starting to get the sense that the company may be lined up for a period of disappointment.
As always, our models filter through the data to identify those companies that are setting up for short covering rallies. These rallies occur when short sellers build large positions in stocks that are performing well, eventually causing the short sellers to turn into buyers themselves to cover their losing position, adding even more buying pressure to the stock.
Recent results from our model’s search for short squeeze candidates are listed in the table below.
So here are three stocks we think are primed for a short squeeze:
Stocks Poised for a Short Squeeze: Anheuser-Busch Inbev Sa (BUD)
Anheuser-Busch Inbev Sa (BUD) – It’s lower on the list, but the recent short interest activity has our attention. The beverage giant had a rough summer as its stock price dove more than 18%. After bottoming just above $100, BUD stock shares have driven back towards its all-time highs at $130.
What is interesting is that the short sellers have become more active than ever on BUD stock as it approaches its highs again. This has all of the markings of a pending short squeeze.
Shares have seen some weakness over the last two weeks, but technical support should help BUD stock correct itself and move back to a price of $130. A move above this level will start to get the short sellers nervous and likely to start buying the stock back to cover their losing shorts.
Watch for a price target of $145 in the first quarter of 2016.
Stocks Poised for a Short Squeeze: Dr. Pepper Snapple Group Inc. (DPS)
Dr. Pepper Snapple Group Inc. (DPS) – Another beverage (consumer staple) company on the list is Dr. Pepper Snapple Group. These shares have been on a straight line rally since the beginning of 2014 as the company has performed more strongly that its peers.
According to our research, DPS stock tends to perform twice as good as the market when the short interest ratio is registering a reading of six or higher. The most recent readings have the ratio at seven and climbing.
Also rounding out the bullish outlook for DPS stock is the fact that Wall Street has all but ignored its performance. After returning more than 24% in the last twelve months, only 13% of the analysts covering DPS have it ranked a buy.
A pending short squeeze and likely analyst upgrades have our models targeting a move to $115 in the first quarter for DPS stock.
Stocks Poised for a Short Squeeze: Sunpower Corp (SPWR)
Sunpower Corp (SPWR) – Solar stocks and solar-related stocks got a bump this week as House Republicans announced a bill to extend solar tax credits. The move should have short sellers as nervous as a long tailed cat in a room full of rocking chairs.
Ahead of the announcement, short interest on SPWR stock had increased 9% and was trending to its highest readings in 2015. The last time that the short interest ratio for Sunpower hit these levels was in August 2014, ahead of a 21% rally, which could repeat itself now.
The SPWR stock charts show fairly significant resistance at the $29 price. This means that a price above $29 is likely to target a short covering rally that will drive prices towards our short-term target of $33.
As of this writing, The Johnson Group did not hold a position in any of the aforementioned securities.