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3 Nasdaq Short-Squeeze Stocks - 16815 views
The stock ripped to the upside Thursday by more than 14% after the company issued first-quarter guidance that handily beat Wall Street’s expectations. Netflix said that first-quarter earnings may rise to $49 million to $62 million, with revenue of $684 million to $706 million. Wall Street projections were for a profit of $46.5 million on sales of $677.80 million.
Make no mistake about it: The great fundamental report from Netflix is only part of the story of why the stock is on fire. The rest is due to the short-sellers, who are fighting the trend and getting hammered on their bearish bets. The current short interest as a percentage of the float for Netflix sits at around 23%. The stock is now trading at all-time highs because of the short squeeze the bears have created by betting against a company that continues to report solid results.
There are even some famous investors short this name, including Whitney Tilson, who have pushed the idea that shorting Netflix due to its high valuation is a viable investment strategy. Netflix currently trades at around 79 times future earnings. The problem with this thesis is that nobody knows when the market will decide to care about the valuation, so being short can be a painful endeavor.
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What’s even more important to know about Netflix is that the stock is in a ridiculous uptrend and the fundamentals continue to support higher prices. One of the worst ideas for any trader is to be short a stock whose fundamentals remain strong, even if the valuation is a bit stretched. Investors who decided to short Netflix solely off of valuation are learning a very hard lesson in the markets: The probability of making money when you fight a trend just isn’t very high.
I can make the exact same argument for the entire U.S. stock market right now. There are so many pundits out there who continue to push the idea that the market is overvalued and due for a major correction. Unfortunately for them, that correction still hasn’t arrived, and the U.S. stock market continues to push higher. This is why I will continue to stress that market players need to stay with the trend until we see something concrete that suggests it might be near an end.
With all of this in mind, let’s take a look at a number of Nasdaq stocks that could be the next in line to experience a major short squeeze a la Netflix.
One Nasdaq stock that I think has the potential to see a big short squeeze is OpenTable (OPEN). Together with its subsidiaries, Open Table provides restaurant reservation solutions in the U.S., Canada, Mexico, Europe and Asia, forming an online network to connect reservation-taking restaurants with their diners. The stock is off to a solid start in 2011 with shares already up around 14%.
OpenTable is no stranger to growth. The company has reported accelerated sales growth in recent quarters, with the most-recent report showing growth of around 44%. Earnings during the last quarter were up 188%, and analysts are predicting sales growth of around 54% for 2011.
Despite those bullish projections, bears on Wall Street continue to short this stock, mainly because they believe it’s overvalued. Once again, famous investor Whitney Tilson is one of those bears short OpenTable. Tilson thinks the stock could drop by at least 50% due to its high valuation of 74 times forward earnings.
The current short interest as a percentage of the float for OpenTable stands at around 29% as of Jan. 14. This is an extremely high short interest for a stock that only has a tradable float of around 16.5 million shares. What’s even more bullish about OpenTable is that the stock is close to breaking out and printing all-time highs. Traders should watch for the stock to trade above $83 a share for confirmation of a breakout. If that does happen, I think that OpenTable will be well on its way towards trading up to $100 a share.
On the other side of the trade, Michael Shulman of InvestorPlace recently included Open Table as one of nine cult stocks investors should avoid.
Another heavily shorted Nasdaq stock that looks ripe for a major short squeeze is Sears Holdings (SHLD), a broadline retailer with 2,235 full-line and 1,284 specialty retail stores in the U.S. operating through Kmart and Sears, and 402 full-line and specialty retail stores in Canada. This stock is off to a decent start in 2011 with shares up around 3.5%.
Sears is due to report earnings on Feb. 24, and Wall Street is hoping for better results than the double-digit loss it reported in the third quarter of 2010. I think the chances for a strong report are high now that Sears has fully integrated using mobile applications to help push sales. It seems hedge fund manager and Sears Chairman Eddie Lampert has recognized the huge trend that Apple (AAPL) has helped revolutionize with doing business through Web-based applications.
Sears recently launched a mobile app called Mygofer that allows users to shop for items such as groceries, beauty products, pet food, clothes, prescriptions and electronics. After a user has finalized his list of purchases, he can then either pick them up in-store or have then sent to his home or office the same day. Mygofer allows customers to shop by brand or by product category to make the shopping experience fast and easy. On Dec. 28, the company said that millions of customers used the app during the holiday season to make purchases.
I think this new app for Sears is going to be huge. For once, it gives Sears a competitive edge that could lure in new customers and increase customer satisfaction. In the go-go world we live in, Mygofer could help Sears steal market share form Wal-Mart (WMT) and Target (TGT). It could even help the company take share from online retailers such as Amazon.com (AMZN).
The current short interest as a percentage of the float for Sears is a rather large 30%. The bears are betting that Lampert will be unsuccessful in turning this once-left-for-dead retailer around since he had little retail experience before he took over the company. But Lampert is a successful hedge fund manager, and I have a feeling he knows how to ride the trends in a business to create value. He’s been doing just that at his hedge fund for years by jumping on the right investment trends that have helped to create great wealth for his clients.
Sears is nowhere near its all-time high around $200 a share, but the stock does look ready to break out above some past overhead resistance at around $79. If that does indeed happen, look for the stock to start to gear up to make a run toward its 52-week high of $125.42 a share.
In addition to Lampert's ESL Investments, major Sears bulls as of the most-recent reporting period include Fairholme Capital's Bruce Berkowitz -- the stock comprises 9.4% of the total portfolio -- and Tiger Global Management. Insider Monkey recently included the stock in a list of 20 stocks analysts expect to dive the most, but according to Jake Lynch, Sears is one of 10 worst-rated stocks that could get a boost.
One last Nasdaq stock that could be setting up for a big short squeeze is Veeco Instruments (VECO), which designs, manufactures, markets and services enabling solutions for customers in the high brightness light emitting diode, solar, data storage, scientific research, semiconductor and industrial markets. This stock hasn’t shone much in 2011, with shares up only around 4%, but I think that’s going to change very soon. The reason I like the future prospects for Veeco is due to the growing trend toward LED lighting by corporations and governments around the world.
This trend is mainly fueled by the demand for energy efficiency that’s gained with LED lighting. LED lighting is also a major hit in the marketplace because it helps to keep costs low. I think we’re about to enter a sustained period of rising energy prices, so LED lighting should be in a bull market for some time to come.
Lots of investors are worried that Veeco could become the next Cree (CREE), which dropped substantially after a recent poor earnings report. Cree, also a heavily shorted Nasdaq stock, fell close to 15% after the company missed analysts’ projections due an inventory correction in the company’s core LED component market.
However, unlike Cree, which likely had a company-specific problem, Veeco is a broader and more-diversified way to play LED lighting since the firm is a leading equipment supplier. Think of Veeco as the arms supplier to the hot-trending LED lighting market. It doesn't have the risk of taking a big earnings hit if a client leaves -- it just needs the overall LED market to be hot so that LED manufactures continue to purchase its products and services.
Currently, the short interest as a percentage of the float for Veeco sits at a whopping 32%. If the bears are wrong about the LED market, then this stock is going to experience an absolutely huge short squeeze sometime in the near future. Market players should watch for this stock to move above $51 to $54.50 a share. Those levels are clear past resistance levels, which if breached, should be a sign that a major short squeeze is gearing up.
To see more heavily shorted Nasdaq stocks, check out the Heavily Shorted Nasdaq Stocks portfolio on Stockpickr.
At the time of publication, author had no positions in stocks mentioned.
Roberto Pedone, based out of Windermere, Fla., is an independent trader who focuses on stocks, options, futures, commodities and currencies. He is also an outside contributor to Beconequity.com and maintains the website Maddmoney.net, which he sold to Blue Wave Advisors in 2008. Roberto studied International Business at The Milwaukee School of Engineering, and he spent a year overseas studying business in Lubeck, Germany.