Short sellers have been backing away from some of the larger issues, despite the fact that common sense tells us now — in August, when the market looks weak — is the time to hedge bets and short stocks. Interestingly enough, however, our latest search for short squeeze candidates has dredged up something out of the ordinary.
The latest short interest data released this week shows that short sellers have been betting against some defensive names that are now getting buying interest.
High-yielding sectors such as utilities, real estate investment trusts (REITs) and consumer staples are among the groups that have attracted shorting activity over the past two weeks. And that has a number of these defensive stocks on our radar as potential beneficiaries of a short squeeze.
Among the S&P 500 companies, our short covering models uncovered a list of 38 stocks in position to rally as the result of bears having to buy back shares to cover their short positions. The following three are of particular interest, as they’re defensive names that should benefit from seasonality strength to boot.
These three short squeeze stock picks aren’t exciting, but the potential returns are.
Short Squeeze Stock Picks: American Water Works (AWK)
Dividend Yield: 2%
You can’t have a list of boring stocks without a utility company, right?
The bears don’t see it that way, however. To them, American Water Works Company Inc (NYSE:AWK) looks like an exciting opportunity. Current short interest on AWK is about six times the average daily volume of the stock. This is the threshold at which our models detect a high likelihood for a short-covering rally.
American Water Works took a step back following an earnings miss in early August, but AWK shares have rallied back to the $82 level since then — above pre-earnings prices. This also is the site of chart resistance.
AWK is trading in a technically strong trend, with shares above their 50-day moving average, which also is heading higher.
In short, a move above the trigger price of $82.50 will get the shorts running into the market to cover their bearish bets. That means more buying, which will trigger a short squeeze move above $88 in short order.
Short Squeeze Stock Picks: Hanesbrands (HBI)
Dividend Yield: 2.5%
Another yawn-worthy company that has attracted the interest of short sellers is Hanesbrands Inc. (NYSE:HBI). The stock has been performing closely with the market as Hanesbrands shares are up about 9% for the year. The stock also pays a dividend of 2.5%, which is making the stock more attractive as interest rates continue to ebb.
From a technical perspective, Hanesbrands is trading above its 50-day moving average, which also is trending higher. This indicates that the stock is in a bullish trend that will see shares trading higher over the next four to six weeks. This will add pressure to the shorts to start covering their positions.
Hanesbrands halted its advance at $24.50 earlier this month after a short-term earnings driven rally took the stock into overbought territory. A move back to this level will trigger the short covering rally. The current short interest ratio of 15 times the average daily volume of the stock indicates a target of $27 on this rally, or a quick return of nearly 15%.
Short Squeeze Stock Picks: Consolidated Edison (ED)
Dividend Yield: 3.3%
And back to boring utilities we go with Consolidated Edison, Inc. (NYSE:ED).
The utility company is about as plain as a brown paper sack. For the most part, investors use a stock like this for defensive purposes and for its 3.3% dividend yield.
Utilities have been accumulating cash flow from investors of late as a defensive position. The stock has outpaced the S&P 500 for the year, returning more than 13% as of today. In addition, the technical case has been strong and growing stronger.
We saw a consolidation and test of Consolidated Edison’s 50-day moving average through July that has resulted in renewed strength in this trend. Now, the 50-day trendline is starting to advance higher, indicating that ED has a bullish outlook over the next four to six weeks.
We saw shares rally to $84 in June, only to reverse lower. With a short interest ratio of 7, this establishes the same $84 as a trigger price for a short squeeze that will drive shares toward $90.
As of this writing, Johnson Research Group did not hold a position in any of the aforementioned securities.