This is the type of market that short sellers usually dream about, as volatility and trend changes are opening the field for bearish trades. But according to the most recent short interest data we’ve yet to see short sellers truly engage the opportunity.
From a contrarian perspective, this holds some concern for the broad market based on the fact that market bottoms are market by a surge in bearish sentiment and trading activity. For this reason, our outlook for the S&P 500 and other major indices remains bearish.
That said, we’ve been talking about the fact that 2016 will likely be a stock-picker’s market, in which case the recent short interest does produce some interesting trade ideas as we are seeing some targeted areas of the market where shorts are surging.
The table below identifies the companies that meet our model’s criteria as potential short squeeze candidates.
From this list, we’ve identified three that stand out as potential bullish opportunities, even in the current bear market conditions.
Short Squeeze Stocks: Briggs & Stratton Corporation (BGG)
Industrial company Briggs & Stratton Corporation (BGG) is well-known for the small engines that power a bevy of machines. Shares surged in January as the company announced mixed earnings, but indicated a better-than-expected outlook for the 2016 operating year.
The improved outlook has garnered some attention from Wall Street as BGG shares got one upgrade, however it’s the activity in the short interest that looks to help drive prices higher.
Trading 20% higher on a year-to-date basis, Briggs and Stratton stock stands out among the crowd; however, the short sellers are increasing their bets against BGG shares continuing to rise. Short interest increased 4% in the latest report, indicating that the short squeeze potential remains in play.
We’re targeting a move towards $22 for Briggs and Stratton stock over the next three months — a 10% gain in a very tight market.
Short Squeeze Stocks: Dean Foods Co (DF)
Casual dining and food companies have had the momentum for the last year as consumers haven’t stopped spending in this area. As a result, the fundamental picture for Dean Foods Co (DF) stock has been on the mend, with revenue showing signs of improvement and earnings topping expectations.
The analyst community and short sellers are on the wrong side of this one, though, as only 25% of Wall Street analysts have Dean Foods stock ranked a buy, and short interest remains relatively high. DF stock got an upgrade this week, which will help things shake out above the $20 level, increasing the odds of a short squeeze in the near future.
Our models rank Dean Foods a strong buy with a target price of $23 over the next three months.
Short Squeeze Stocks: Dunkin Brands Group Inc (DNKN)
After topping out in July of 2015, Dunkin Brands Group Inc (DNKN) has spent the last eight months underperforming the market — a situation that looks ready to change.
DNKN stock spent much of the last quarter building a technical bottom at the $42 level only to see the market’s December swoon break through the floor. Now, despite the fact that the market is even lower, Dunkin’ shares are regaining control of this technically significant level, marking a win for the stock and an improvement in the short-term outlook.
Short sellers have been all over the decline, raising their bearish bets on the stock, but a reversal in the charts will now start to pressure this group to turn into buyers in order to cover their profitable positions. We see the move back above $42 as the short squeeze trigger that will target a swift move towards $46.
As of this writing, Johnson Research Group did not hold a position in any of the aforementioned securities.