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5 Defensive Stock Short-Squeeze Plays - 11948 views
BALTIMORE (Stockpickr) -- Is it time to get defensive with your portfolio? If trailing returns for the last quarter are any indication, it is.
That’s because the last few months have brought outsized returns from traditionally defensive industries -- groups such as health care, utilities and consumer staples. There are a few reasons why that’s the case right now. Most significantly, inflationary headwinds and concerns over the health of the economy are making investors skittish about risk assets -- instead, they’re flocking to “safer” income generation instruments. It’s that behavior that’s creating a potential short-squeeze opportunity right now.
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A short squeeze is the buying frenzy that ensues when a heavily shorted stock starts to look attractive again to investors, causing short-sellers to cover their positions -- and share price to skyrocket. 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.
There are plenty of reasons why stocks in defensive industries may be shorted -- but because they’re fundamentally driven investment stories, mispricing and overzealous shorts often shake themselves out quickly. That’s why we’re looking at five defensive short squeeze opportunities this week.
With that, here’s a look at defensive stocks with short squeeze potential this summer.
Canada-based energy generation utility TransAlta (TAC) is a good example of an income-generation play that’s being shorted heavily right now. With a short interest ratio of 21.6, it would take short-sellers more than a month to unwind their bets against TransAlta at current volume levels.
But there’s reason to bet on shares of this generation stock. One of the most significant is TransAlta’s sizable 5.51% dividend yield, a payout that the company is able to meet without too much of a struggle.
Related: High-Yield Canadian Dividend Stocks
Normally, inflationary environments discount securities that pay income -- but that’s not the case for TransAlta. Because this stock is a power generation play, its income should increase lock in step with commodity prices. Because the firm’s margins are within the high single digits, incremental increases in energy costs should realistically have an outsized impact on the firm’s bottom line.
That’s particularly true if an attractive trading environment helps TransAlta’s energy trading business increase profitability. While acquisition-fuelled debt and regulation risks do factor into this stock’s attractiveness, I suspect that shorts are overblown.
While energy prices have been on the rise, one commodity that’s languished has been natural gas. As a result, investors have largely ignored natural gas-related stocks -- or outright shorted them. But in the energy market, rising tides lift all ships, and nat gas could be due for a drive higher.
That’s because rising prices in alternatives such as oil make natural gas a more attractive option -- attractive enough to overcome switching costs that previously made nat gas economically unviable.
That factor should bode well for distributors like Atmos Energy (ATO). Atmos is largely insulated from commodity price movements thanks to automated rate filings that diminish regulatory risks and ensure that the company is compensated for delivering energy, not for the ebb and flow of the market.
With a very efficient cost structure and one of the largest natural gas pipeline holdings in the country, Atmos should be well-suited to benefit from an increase in natgas consumption.
A 3.93% dividend yield should help to sway investors to shares as well -- the company has a history of dividend rate increases and more than 100 consecutive payouts to shareholders under its belt. Atmos is one of the highest-yielding gas and utility stocks.
In the grocery game, Weis Markets (WMK) is far from the best in the breed. This stock doesn’t offer investors an economic moat, an attractive niche or any protection from the inflationary prices that are pushing investors to defensive stocks in the first place.
But even though Weis isn’t the most attractive grocery play right now, its absurd short interest of 30.1 is making it worth watching right now.
That’s because while Weis is nothing special, it’s still a reasonably high-performing firm with an impressive 99-year track record. While Weis is late to the game on the kinds of store renovations that attract high-dollar consumers, the chain has also been reluctant to spend money on expensive expansion efforts, even in the height of the real estate boom. That’s helped the company maintain an enviable, debt-free balance sheet that makes the low margins of the grocery business seem somewhat more impressive.
A growing private label business has helped to grow the firm’s top line throughout the recession, as has the value proposition that the firm is offering consumers. As fundamentals continue to get rosier, expect frustrated short-sellers to look for less attractive businesses.
C.R. Bard’s (BCR) shorts have been under siege in 2011 as this medical device stock continues to deliver solid performance numbers to Wall Street. All told, shares of the firm have rallied more than 17.6% year-to-date, vs. just 7.9% returns from the S&P 500. Nevertheless, a short ratio of 15.5 means that a considerable chunk of investors are short C.R. Bard right now.
As a medical device maker, C.R. Bard has been continually improving its positioning in a highly competitive market. From a one-trick pony years ago, today’s firm is a major player in a number of attractive niches that provide ample opportunities for sales growth as C.R. Bard carves out increasing chunks of its markets.
Key to C.R. Bard’s growth strategy is the fact that around 90% of revenue comes from deep-margin consumable products that are recurring in nature. As a result, the company is able to generate ample cash to cover its obligations.
With increased focus on improving shareholder value this year, it’ll be interesting to see how a continuation of the 2011 rally in Bard plays out for short-sellers’ abilities to stay in the stock.
Another heavily shorted medical stock is RedMed (RMD), a $5 billion medical device firm that develops products that treat breathing disorders. Specifically, ResMed is one of the leaders in developing solutions for sleep apnea patients, a market that the firm took from its competitors by bringing superior devices to market.
That competition is far from conceding RedMed’s success, however. With well-funded rivals trying to reclaim ResMed’s share of the sleep apnea treatment market, expect battles to be hard won.
Related: 10 Health Care Stocks to Watch
Perhaps just not as hard won as the short-seller believe. With a short ratio of 11.9, it would take more than two weeks for shorts to cover their positions at current volume levels. Strong margins and a net cash position should help fuel the firm’s moves into new markets going forward.
To see these plays in action, check out the Defensive Short Squeeze Stocks 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.
-- Written by Jonas Elmerraji in Baltimore.
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.