Since the stock market has taken a few big drops recently, now might be a perfect opportunity to buy short squeeze stocks. What is a short squeeze stock, you may ask?
A short squeeze takes place when large number of short sellers have shorted a stock, and the stock comes out with unexpected good news, causing the price of the stock to spike by a huge amount, because all the short sellers have to scramble to cover their positions by buying in their shares. This mad dash to buy often generates margin calls, which causes more buying and higher prices of the stock.
Potential short squeeze plays have several metrics to compare one stock to another. One of the most popular metrics is the Short Interest Ratio, also known as the Days to Cover. This measures the number of days it would take the short sellers to cover their positions based on the average daily trading volume. The longer it would take to cover, the higher the ratio. Another analysis is the number of shares that are currently shorted as a percentage of the float (the float is the number of shares that are actively traded). The higher the percentage of shorted shares, the greater the chance that an upside surprise would drive up the price.
Here is an example. ITT Educational Services Inc. (ESI), the for-profit education company, has a short ratio of about 16. This means that if the short sellers wanted to cover their shorts, it would take them approximately 16 days to close their positions, based on the average daily trading volume. In addition, an incredible 57% of the float has been shorted. Just the slightest bit of good news could send the stock skyrocketing. The stock currently trades at nine times trailing earnings and 11 times forward earnings.
Another stock with a high short interest is j2 Global, Inc. (JCOM), the cloud computing and digital media company based at Hollywood Boulevard in California. The stock has an outrageously high short ratio of 28, which means it would take a month for the short sellers to cover. 27% of the float has been shorted. It trades at 19 times trailing earnings and 16 times forward earnings. What is interesting is that the latest reported quarterly earnings were up 16% on a 58% boost in revenues.
Obviously, there is no guarantee that good news will hit these stocks, but if it does, the rise in the price can be substantial. If you list interesting stock lists like this, check out the free stock lists at WallStreetNewsNetwork.com.
Disclosure: The author didn't own any of the above at the time the article was written.