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5 Short-Squeeze Stocks That Could Explode in 2011 - 16880 views
BALTIMORE (Stockpickr) --What’s in a name? If you’re a major corporation, quite a lot.
From attracting consumers to reigning in business partners, a company’s brand can easily be its most valuable asset. The same rules hold true for stocks. For years, retail investors have chased stocks of companies they’re familiar with. As a result, household name stocks generally benefit from a high level of trading activity -- and outsized performance during bull markets.
But the opposite is true as well. When short-sellers are looking for promising short candidates, household name stocks with a few black clouds over them tend to have a pretty big target on their backs. Frequently, that high profile can lead to ambitious shorts piling into shares of those big-name plays.
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Still, short sellers should beware. After all, heavily shorted household-name stocks present an awesome short squeeze opportunity.
First, a bit of background: A short squeeze is the buying frenzy that ensues when a heavily shorted stock starts to look attractive again to investors, causing share price to skyrocket as those shorts cover their positions. One of the best indicators of just how high a short-squeezed stock could go is the short interest ratio, which estimates 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 months.
With that, here’s a look at five household name short-squeeze opportunities that could explode in 2011.
When it comes to household name status, they don’t get much bigger than Sears Holdings (SHLD). As one of the biggest mainline retailers in the U.S. and Canada, Sears has a portfolio of some of the continent’s most well-known brands under its belt. Between its namesake Sears stores and big-box Kmart locations, the company’s retail locations dot nearly every town and city in the country.
But size certainly hasn’t spared Sears from the short-sellers. At present, the company has a short ratio of 23.2. That means it would take more than a month for shorts to unload their positions at current volume levels.
Sears has more than its fair share of black clouds hanging overhead right now. Thin margins and sliding sales numbers are the two biggest concerns that Sears will need to confront in the near-term to quell investors’ concerns. That said, the firm is likely to see some organic upside from consumer spending growth this year. If management can correct its comedy of errors, Sears is likely to become a competitive power again.
Even though Sears’ retail business isn’t particularly compelling yet, its stunning portfolio of brands is. Sears owns proprietary names Kenmore, Craftsman, Lands’ End, and DieHard – four brands that own premium positioning in consumers’ minds right now. The company has been working hard to leverage that attractive product portfolio, selling some of those names outside of its own stores. More than any other in the pipeline, this change has the potential to be a game changer for Sears.
As Sears gets its act together, I wouldn’t want to be short this stock.
I also featured Sears recently in “5 Contrarian Bets From Bruce Berkowitz.”
Video game retailer GameStop (GME) has already taught some painful lessons to short-sellers in 2011. Shares of the company have rallied nearly 20% since the start of the year, dramatically outpacing the broad market, and putting shorts underwater.
Still, quite a few short-sellers are clinging onto their positions right now -- GameStop’s short interest ratio of 11.3 means that it would take more than two full weeks of buying pressure at current volume levels for short sellers to close their positions.
Two headwinds are challenging GameStop’s domination of the video game business: direct challenges from big-box stores and direct challenges from game publishers. Big-box competitors such as Best Buy (BBY) are vying for a chunk of the used game market, where GameStop controls around 80% of the business. At the same time, publishers are looking to usurp the traditional physical distribution model, offering digital downloads of their titles and downloadable content that can’t transfer when used games are resold.
While those challenges pose real risks to GameStop’s business, the company is unlikely to get squeezed out of its niche. That’s because GameStop offers unmatched used game and console inventories that big-box rivals simply won’t be able to come near. As a result, GameStop has carved out an attractive moat as a more attractive place for gaming enthusiasts, the consumers who contribute an overwhelming chunk of revenues for both used and new games.
U.S. Cellular (USM) is currently the sixth-largest cellular carrier in the United States, a pole position that makes USM a pipsqueak when compared with massive rivals such as AT&T (T) and Verizon (VZ). Even so, this second-tier carrier looks cheap right now thanks to heavy short interest. Currently, the stock has a short interest ratio of 10.1.
As cellular service has become more commoditized, U.S. Cellular has become more marginalized. That’s because the firm’s focus right in the middle of the cell phone consumer spectrum essentially leaves it without a defensible niche. Worse, its small size makes maintaining a cutting edge network and licensing the best smartphones incredibly difficult.
But while U.S. Cellular is down, it’s far from out. The company has been working hard at striking down all of those barriers, rolling out a 4G network this fall, and growing its smartphone offerings.
While U.S. Cellular only has 6 million subscribers, those customers apparently love their carrier. Customer churn is very low compared to the industry standard, and customer service is unmatched. AT&T’s planned T-Mobile acquisition shines some light on per-subscriber valuation numbers for the industry -- even given a sizable discount for USM’s tiny size, it looks like a very cheap buyout candidate in this consolidation-crazy industry.
Keep a close eye on this name in 2011.
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Campbell Soup (CPB) is another huge household-name stock that’s on the same scale as Sears. As the largest soup producer in the world, the company’s iconic cans are nearly ubiquitous in consumer pantries. And soup is just the tip of the iceburg -- Campbell owns food brands such as Pace, Swanson and Pepperidge Farm as well.
Even though increasing input costs have been threatening CPB’s profitability, the company has still managed to maintain attractive double-digit net margins throughout the commodity run-up. Exposure to emerging market supermarket shelves is a big factor in the company’s ability to continue to perform at a high level. Currently, international sales account for nearly a third of the company’s revenues.
Campbell Soup has a pretty high short interest ratio right now, at 10.4. Frankly, that’s a scary metric for short sellers -- margins notwithstanding, Campbell generates a mountain of free cash, and pays it out directly to shareholders in the form of dividends. At current prices, the company’s dividend yield rings in at 3.35%, a generous payout that should keep income investors piling into shares. As Campbell Soup continues to pour value into shares, shorts should be wary.
Campbell is one of the top-yielding food and beverage stocks.
Even though Fastenal (FAST) isn’t a consumer stock, it’s still a name that scores of consumers are familiar with. That’s because Fastenal’s 2,400 stores are hard to miss -- and its nearly 1 million fasteners, tools, and janitorial products can be found at nearly any building. While the company does have large exposure to the beleaguered industrial segment of the economy, fears of financial collapse are largely overblown. In fact, Fastenal has managed to steadily increase sales to approach pre-recession levels once again.
While Fastenal’s geographic footprint is impressive, its profitability is what’s really impressive. While most short targets are hitting near-term profitability hiccups, Fastenal has actually managed to improve its efficiency and grow out its net profit margins to more than 12% in the last quarter. Shares of Fastenal have climbed more than 20% year-to-date as a result -- investors should watch July 12 earnings closely for a glimpse at whether those trends will continue.
Fastenal’s short interest ratio of 14.5 means that it would take nearly three weeks for short-sellers to exit their positions right now.
To see these plays in action, check out the Household-Name Short-Squeeze 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.