Stock Quotes in this Article: BKS, GRMN, HGG, NILE, OSTK

BALTIMORE (Stockpickr) -- It’s November, and that means that Black Friday is the No. 1 thing on retailers’ minds.

Black Friday isn’t just a big deal for consumers just waking up from their turkey-induced food comas the day after Thanksgiving; traditionally, Black Friday is the most important day of the year for the while retail industry. That’s not shocking when you consider that the day gets its name because it’s the time when many retailers turn profitable (or make the move to black rather than red ink on their income statements) for the year. While earnings season is important, a good showing on Black Friday is make-or-break for the retail industry.

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    For us, it’s also a holiday tradition of a different sort. It’s an opportunity to look at Black Friday short-squeeze opportunities in the retail stocks. In the past two years, that search has been successful. In the last year, our portfolio of three heavily shorted Black Friday stocks returned an average gain of 32.87%, vs. 2.96% gains from the S&P 500. The year before, our list beat the S&P by 27.38%.

    Part of that success comes from the power of a short squeeze. For the uninitiated, a short squeeze is the buying frenzy that ensues when a heavily shorted stock starts to look attractive again to investors. As more and more of the short investors buy shares to cover their positions, share prices skyrocket.

    Almost anything can trigger a short squeeze: including trumping earnings expectations, winning a lawsuit, unveiling a new product and even announcing a management change.

    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.

    Naturally, these plays aren’t without their blemishes -- there’s a reason that these stocks are being heavily shorted. But for investors looking for exposure to a speculative play with a beefier risk/reward tradeoff, these could be powerful upside plays for the coming year.

    Here's a look at this year's Black Friday plays.

     

    Garmin

    It makes sense to start off with the sole non-retail stock on our list, Garmin (GRMN). Garmin is the leading name in the GPS market, a product that’s typically high on consumers’ shopping lists every Black Friday. Short-sellers have bid up the short interest ratio of this stock to 21.4, which means that it would take a full month of buying for short-sellers to exit their positions right now.

    Garmin’s bets on the somewhat commoditized consumer GPS business and a high dividend yield (at 4.68%) are the two biggest reasons why shorts have piled into this stock. But there’s more to Garmin than that. The firm’s technology portfolio is robust thanks to successful marine and aviation navigation divisions, and new advances could help to de-commoditize Garmin’s products if they trickle down to its consumer offerings.

    >>5 Earnings Stocks Set to Soar

    At the same time, this stock sports an exceptional balance sheet (with no debt) and hefty net margins, two factors that should help to support the hefty dividend, which makes Garmin one of the top-yielding electronics stocks.

    The firm announced its third quarter earnings this morning, and it looks like a small-scale short-squeeze is already boosting shares early in trading. Garmin’s numbers trounced analysts’ meager expectations, and guidance looks solid for the next full year. Strong sales on Black Friday could accelerate the buying in this stock later this month.

    Barnes & Noble

    With the headwinds that have been challenging booksellers lately, it’s no surprise that short-sellers have been converging on Barnes & Noble (BKS). But the negativity may be overblown at this point: Barnes & Noble’s short interest ratio currently sits at 10.6, which means that it would take more than two weeks of buying for shorts to cover their positions at current volume levels.

    The key difference for Barnes & Noble’s 1,341 retail bookstores is the fact that this chain focuses on the experiential side of buying books. By creating an enjoyable atmosphere to shop for books and sip a coffee, BKS isn’t trying to compete against dirt-cheap rivals such as Amazon.com (AMZN). Instead, it’s doing what now-defunct Borders never could: courting shoppers who want to physically peruse bookshelves but don’t want the utilitarian shopping experience.

    One of Barnes & Noble’s biggest positive attributes has been the firm’s embrace of the eBook business. Currently, the company’s Nook e-reader currently owns 25% of the market. The firm is investing considerable resources into building out the digital book business, which could easily become the biggest portion of the business in the next several years.

    Financially, BKS is in sound shape, with a relatively low debt position and a reasonable amount of balance sheet liquidity. While profitability has been tenuous in recent quarters, cash flow generation is significant -- and should keep the company meeting its obligations while it works to change its business in the near-term.

    For another take on Barnes & Noble, check out "5 Scary Stocks to Sell Now."

    HHGregg

    Another name that announced earnings this morning is HHGregg (HGG), the appliance and electronics retailer that operates 173 stores centered on the Southern, Midwestern and Mid-Atlantic regions.

    In many ways, HHGregg picked up where Circuit City left off, acquiring many of the bankrupt firm’s closed stores and applying its own unique business model to them. That’s a growth strategy that’s working well for this company right now.

    >>5 Retail Stocks for Your Shopping Bag

    HHGregg sells everything from televisions and computers to washers and dryers, a business that competes directly with the likes of Best Buy (BBY). While HHGregg doesn’t have the scale of its bigger competitor, it has been outshining them from a growth standpoint. HHGregg actually grew throughout the recession, delivering a 65% top line increase between the start of the recession and the firm’s most recent fiscal year. Profitability has more than doubled over that time.

    This firm also benefitted from competitors’ failings. It greatly expanded its footprint in the last several years, helping to ensure that those increased sales are sustainable. A depressed economy also meant that HHGregg’s growth has been comparatively cheap -- and in the last quarter, management paid off all outstanding long-term debt. On top of that, the company still holds almost $2 per share in cash right now.

    Short-sellers are grossly underestimating this firm’s ability to thrive during economic downturns: a short ratio of 25.6 makes HHGregg the most heavily shorted retailer on our list. Good earnings should help to get the shorts covering ahead of Black Friday.

    Blue Nile

    Blue Nile (NILE) has been a somewhat scary stock in 2011. Because this firm focuses on selling pricey jewelry, investors have been anxious to take a position until the economy starts to heat back up. But shorts haven’t been so cautious. With a short interest ratio of 21.4, it would take a full month of buying pressure for sellers to unwind their positions in this stock.

    When investors think about Blue Nile, they should be thinking about how this firm is revolutionizing the diamond business. While diamond shopping is typically a fairly complicated, opaque process, Blue Nile has made major steps to help commoditize diamond prices and take some of the pressures off of diamond shoppers. Because the firm allows shoppers to sort diamonds by their gemological ratings, the firm reduces the learning curve for new diamond buyers and helps pair them with diamonds in their price range. Not surprisingly then, diamond engagement rings make up the lion’s share of Blue Nile’s revenues.

    The firm’s reputation -- and the ease of making a purchase on its eponymous Web site -- should help to convince a larger number of buyers to make the transition from brick-and-mortar jewelry stores to online shopping for big-ticket jewelry. Obviously, rising consumer spending would benefit Blue Nile more than most, but revenues have already surpassed pre-recession levels.

    A stellar balance sheet with a massive cash position and effectively no debt makes this stock all the more attractive right now.

    Blue Nile, one of TheStreet Ratings' top-rated Internet catalog and retail stocks, was also featured recently in "5 Stocks Setting Up to Break Out."

    Overstock.com

    Finally, there’s Overstock.com (OSTK), another e-tailer that’s got a well-known animosity toward short-sellers. For the last few years, CEO Patrick Byrne has been leading a crusade against short-sellers in his firm’s stock, taking a number of participants to court over what he calls manipulation of Overstock’s shares. That hasn’t really done a good job of scaring off short-sellers, though: At 20.9, this firm’s short ratio is still very high.

    Rather than lawsuits, Overstock will need to shake off shorts with financial performance. Overstock’s business centers around selling discount brand-name closeout merchandise through its popular Web site. While the company has found some challenges in recent quarters, the past several years have brought pretty significant growth to this firm -- Overstock is another name that increased its revenues dramatically during the recession, and the past two full years have come with a turn to profitability for shareholders.

    >>5 Breakout Trades for This Crazy Market

    This stock’s balance sheet is even better than most of its retail peers; with a $79 million cash position, nearly half of Overstock’s market capitalization is paid for in cold hard cash. That’s a staggeringly liquid balance sheet, and it helps to smooth some of the speed bumps that have taken place over on OSTK’s income statement. While this name isn’t as strong as the likes of HHGregg, this is a good alternative for investors looking to add an online-centric sort squeeze candidate to their portfolios.

    To see this week’s short squeezes in action, check out the Black Friday 2011 Short Squeezes portfolio on Stockpickr.

    -- Written by Jonas Elmerraji in Baltimore.

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    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.