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5 S&P 500 Stocks for a Short-Squeeze Pop - 8564 views
BALTIMORE (Stockpickr) -- As of Friday’s open, the S&P 500 is sitting more than 7% lower since the start of 2011. But that’s not really a fair measure of what’s been going on in stocks this year.
The problem is that 7% losses suggest that shorts are making money in this market. By and large, they’re not. Downward moves have been swift, followed by major upside corrections. In other words, the market has been rife with bear traps this year. A more telling metric is the S&P’s range right now -- from peak to trough, the S&P has actually moved more than 23% in either direction from the year’s open. That’s indicative of the roller coaster ride that investors have seen in 2011.
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But despite that reality, the 7% absolute decline in the calendar year is prompting many investors to put their short caps on and make decisive bets against stocks. With equity valuations looking cheap right now, that’s creating some potential short squeezes in the S&P 500.
Put simply, 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. 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 year.
With that, here’s a look at five S&P 500 constituents that look like prime short-squeeze candidates right now.
The rationale behind shorting AutoNation (AN) makes sense. As the largest car dealer in the U.S., AutoNation has exposure to one of the hardest-hit industries during the 2008 financial crisis; it follows that investors would turn to AN as a short candidate right now as economic concerns become headline stories again. But that’s not exactly the whole story.
The economy is structurally different this time around. The Fed’s decision to mash rates into the ground has effectively made money free -- and car manufacturers are willing to make that cash available to stimulate auto sales. Sales are moving higher as a result: 12 out of 13 auto categories have seen year-to-date gains in 2011 vs. last year. That’s helped buoy AutoNation’s profitability this year.
AutoNation owns 213 car dealerships spread across 15 states, a disparate enough geographic footprint that the firm’s fortunes are locked to the prosperity of any given region. That size also gives the firm efficiencies that smaller rivals can’t match -- an advantage that makes AN’s profitability stronger than average. It’s also worth noting that almost half of the firm’s bottom line comes from its parts and service business, a more recession-resistant business that’s not beholden to the state of the credit market.
Car sales is a capital-intense business, and AutoNation carries around $1.4 billion in debt as a result. Still, the combination of low rates, significant cash flow generation, and ample balance sheet liquidity means that this stock isn’t much of a concern for the foreseeable future. A short interest ratio of 13 means that it would take close to three weeks of buying for short sellers to exit their positions at current volume levels.
Cerner (CERN) is a health care software firm whose platform is used at more than 9,000 hospitals, doctors’ offices and pharmacies to store everything from clinical to administrative and financial data. It’s a direct play on the government’s directive for medical professionals to make the switch to electronic medical records; not surprisingly, almost 85% of the firm’s revenue comes from health care facilities in the U.S.
Because Cerner’s platform can help doctors and hospitals get paid more quickly (by automating the insurance claim process), professionals are incentivized to implement the system sooner rather than later -- particularly now, as the high cost of health care makes the payment cycle all the more crucial for providers. Cerner is also scaling down its system to approach smaller medical practices with its otherwise pricey solutions. The result is a firm that should be capable of continued growth.
Competition is starting to heat up for Cerner right now as other entrants in the healthcare IT field try to capture a chunk of a profitable industry. Even so, Cerner’s high penetration rate among hospitals should help slingshot its popularity among other healthcare practices. The firm’s short interest ratio currently weighs in at 11.3.
2011 has been a comparatively solid year for shareholders of GameStop (GME). While the firm’s shares have climbed just 5% and change year-to-date, that metric means that this stock is outperforming the broad market by more than 12%. Even though that’s helped to attract a short interest ratio of 11, the short case for this stock may be overblown right now.
GameStop is the largest video game and accessory retailer, with more than 9,000 stores spread throughout three continents. The firm is also the world’s largest retailer of used video games, a high margin business that keeps customers coming through GameStop’s doors in search of gaming bargains.
The success of GameStop’s model has prompted ratcheted up competition lately --big box competitor Best Buy (BBY) recently instituted its own used game offerings, and game developers have pushed to cut out the middle man by offering electronic delivery services. Both of those pressures will seriously harm GameStop if the firm can’t adapt.
But that’s exactly what it’s doing. GameStop now offers digital copies of many of the titles it carries, pairing those with its already established loyalty program to drive traffic to make purchases at its site rather than those of competitors. Financially, GameStop has a strong balance sheet, with essentially a debt-neutral position (it’s almost fully offset by cash). That liquidity should help this short squeeze candidate handle any economic speed bumps in the near-term.
Shorts have also been piling into $25 billion defense contracting giant Lockheed Martin (LMT), the firm behind everything from the F-16 to NASA satellites. Lockheed has been under intense pressure in 2011, as the budget debate on Capitol Hill leaves congress looking for any easy spending to cut. With the Joint Chiefs welcoming defense cuts as a reasonable way of trimming the deficit, investors are expecting Lockheed to take some semblance of a hit to its $46 billion in annual revenues.
To counter that, Lockheed and its peers have been trying to embrace alternative revenue streams -- namely IT. By providing IT services to government agencies outside of DoD, the firm is hoping that it can make up for any shortfalls in the defense budget. So far, Lockheed’s plan has been working fairly well; the firm is currently the biggest IT services provider in the federal government. That said, moving from one part of the government’s payroll to another hardly diversifies LMT’s revenues away from potential cuts.
For that, the firm is better suited to look abroad, selling its systems to U.S. allies to expand its customer base. Historically, Congress has been quick to give the thumbs up to international sales for defense contractors. As long as certain corners of the world remain volatile, Lockheed is looking at revenue growth.
HCP (HCP) is a $14 billion medical REIT that owns properties ranging from senior living facilities to labs and medical offices. In all, the trust’s portfolio is made up of more than 900 properties. Too many investors look at REITs such as HCP as a play on the real estate market. They’re not.
Instead, REITs like this one are a way to get exposure to income generation. Structural decisions, like long-term triple-net leases, mean that HCP is very insulated from the ebb and flow of the commercial real estate market -- and a tenant base in the recession-resistant medical field bring that insulation a notch higher. The result is an income stream that currently yields 5.37% for investors who own shares of HCP. That’s particularly appealing in a market like this, where dividends are one of the few ways for buy and hold investors to eke out a meaningful return.
A tenable debt load and plenty of balance sheet liquidity should help keep margins high enough to support that hefty distribution payout. Despite that upside, this stock remains a short squeeze name right now: with a short-interest ratio of 9.1, it would take nearly two weeks of buying for short sellers to close their positions at current volume levels.
HCP shows up on a September list of 30 Top-Rated Fast-Growth Stocks.
To see this week’s short squeezes in action, check out the S&P 500 Short Squeezes 2011 portfolio on Stockpickr.
-- 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.