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3 Large-Cap Short-Squeeze Opportunities - 5857 views
While most investors think of Wall Street’s biggest companies as the most stable, financially sound stocks out there, the truth is that there are plenty of investors who are betting on blue-chip stocks to fall.
Despite the fact that the most secure blue-chips are large-cap stocks -- companies with market capitalizations of $10 billion or greater -- there are more than a few big firms with major economic headwinds, flawed financials or another catalyst that could send shares lower. When that happens, the short-sellers go into attack mode; particularly in 2010, with the remnants of 2008’s bear market still fresh in investors’ minds.
But with that heavy shorting can come the opportunity for bullish investors to profit from the squeeze. A short squeeze -- the buying frenzy that ensues when a heavily shorted stock starts to look attractive again to investors, causing share price to skyrocket -- is just the catalyst these stocks need right now.
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One of the best indicators of just how high a short-squeezed stock could go is the short interest ratio, which divides shares short by average daily trading volume in order to get a ballpark estimate of the number of days it would take for short-sellers to cover their positions. The higher the short ratio, the higher the potential profits when the shorts get squeezed.
And with better analyst coverage and more trading activity in large stocks, the potential for a fast short squeeze is greater in the large-cap world. We originally took a look at potential large-cap short squeezes back in February. Now, with 2011 ahead of us, here’s a look at a new set of potential large-cap short squeeze opportunities.
A $79 billion Canadian banking giant, Royal Bank of Canada (RY) may weigh in as Canada’s largest bank, but that hasn’t spared the firm from facing a similar fate as its contemporaries to the south.
Like many American banks, RY has been plagued by bad loans and lessened value-added sales in this rough economy. Those factors have helped push the stock’s short ratio to 21.9, a number that suggests it would take a month for short-sellers to exit their positions at current volume levels.
But that short argument may be overblown right now.
While RY has faced a bevy of operational challenges of late, its Canadian operations have largely spared the firm from the knocks that U.S. banks took in 2008. While some analysts believe that Canada’s financial industry still has debt-fueled downside ahead of it, those predictions have yet to pan out.
In the meantime, Royal Bank of Canada has done a good job of repairing its deposit base and shoring up its loan book. The company’s sheer size gives it significant advantages over smaller players that can’t survive on lower-margin, higher-volume areas of the banking business. And it also gives the firm an enviable stream of leads for lucrative additional services, including insurance and investments.
The Aberdeen Global Financial Services Fund (GLFIX) is among Royal Bank of Canada’s most well-known institutional investors stateside. The fund owns a 30,000 share stake of the bank in addition to large stakes in other major international banking stocks, such as Itau Unibanco (ITUB) and Banco Bradesco (BBD).
There’s plenty of reason to be bullish about Waste Management (WM) right now. For starters, the firm is the league leader in the waste business, with nearly 20 million customers under its belt. Waste has long been a favored industry because of its recession resistance -- an especially attractive attribute when times are tough.
But those factors haven’t stopped many investors from believing that this stock is garbage. At present, Waste Management sports a short interest ratio of 11.2.
To be sure, there are detractors to this stock. Waste collection is a relatively low-margin industry, and right now operators are approaching market saturation here in the U.S. With relatively high fixed costs (the result of union agreements and the high capital requirements of operating truck fleets and waste disposal sites), Waste Management needs to keep its operations churning to continue to deliver dividend-generating profits to investors.
That said, there’s little else in the way of bearish catalysts to justify the high short ratio this stock is currently seeing. With decent cash generation capabilities, expect trimmer operations -- and more buyers -- ahead.
One of Waste management’s biggest institutional owners is the Allianz NFJ Dividend Value Fund (NFJEX), a mutual fund that holds a four-star rating from Morningstar. Other NFJEX holdings include Intel (INTC) and Lockheed Martin (LMT).
Long-term short-sellers of Dollar General (DG) are hurting right now. All told, this stock has rallied more than 43% year-to-date -- and nearly 15% in the last month.
All of that bullish price action is shaking out the shorts, but not enough to drop Dollar’s short interest ratio below 15. At present volume levels, it’d take short-sellers more than three weeks to close out their bets against this stock.
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In large part, Dollar General has lived up to the recession rally case that many investors had been hoping for: As consumers tightened their purse strings, many opined, this stock should be first in line for sales growth.
It was that very timing that prompted private equity firm KKR (KKR) to take Dollar General public again in Summer 2009, after snatching the stock back in 2007. The financial and operational improvements made by KKR are numerous -- and they pave the way for continued bottom line growth in the next few years.
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Investors like Lone Pine Capital apparently agree. The hedge fund increased its stake in the discount retailer by more than 250% according to its latest filing. Other positions include Apple (AAPL) and Yum! Brands (YUM).
For the rest of this week’s short-squeeze opportunities, including Lan Airlines (LFL) and Shinhan Financial Group (SHG), check out the More 2010 Large-Cap Stock Short-Squeezes portfolio at Stockpickr.
And to find short-squeeze plays of your own, be sure to check out the Stockpickr Answers community for insights and investment ideas.
At the time of publication, author had no positions in stocks mentioned.
Jonas Elmerraji, based out of Baltimore, is the editor and portfolio manager of the Rhino Stock Report, a free investment advisory that returned 15% in 2008. He is a contributor to numerous financial outlets, including Forbes and Investopedia, and has been featured in Investor's Business Daily, in Consumer's Digest and on MSNBC.com.