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BALTIMORE (Stockpickr) -- There’s been a lot of attention on the technology sector lately -- and for good reason. As a group, tech stocks have been handily outperforming the rest of the broad market all year long.
The Nasdaq, historically known as a tech-centric stock exchange, has been handily beating out the S&P 500 in 2011. And sifting out financial names (looking at the Nasdaq 100 presents an even clearer picture of outperformance: year-to-date, the Nasdaq 100 has gained 6.69% while the S&P 500 has struggled to break even. More compelling, relative strength of the Technology Select SPDR ETF (XLK) rose to open this morning at its highest level against the S&P 500 in nine years.
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But all of that positive attention can have some unintended consequences: namely short sellers piling into tech names they think are ready to fall. That’s creating a major short squeeze opportunity right now.
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; a company trumping earnings expectations, winning a lawsuit, unveiling a new product or announcing a management change are just a few examples.
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.
With that, here's a look at five tech stocks with short squeeze potential this week.
Shares of Concur Technologies (CNQR) started the day lower today on last night’s earnings, in spite of what was a very good quarter for the firm. Don’t get shaken by that investor ennui -- the disconnect between Concur’s performance and its price isn’t likely to last for more than a couple of quarters.
One of the biggest reasons for the stock’s reaction to earnings is the company’s short interest ratio: at 14.88, it would take three full weeks of buying pressure for shorts to cover their positions.
Concur is a mid-cap software maker that provides expense management solutions for companies. The firm’s eponymous software platform helps management track the non-payroll costs that employees incur in the course of business. That’s an important product that’s less susceptible to recessionary headwinds than most -- in an environment of corporate belt-tightening, expense management becomes more important, not less.
While Concur is far from the only game in town, expense management software needs to be tightly integrated with other accounting functions, a factor that makes switching costs particularly high. That means that new competitor offerings are less likely to be a real threat to Concur’s customer Rolodex.
Growth has been one of Concur’s strong points for the last several years (throughout the recession, sales more than doubled). While it may get tempered a bit as the firm matures, short-sellers are being overzealous in their bets against this tech stock.
Concur was also highlighted in "5 Stocks Set to Soar off Bullish Earnings."
Harris’ (HRS) main business is selling radio communications equipment to the U.S. government, a customer that’s made no bones about looking for programs and contracts to chop. Admittedly, that’s a challenging market with considerable customer concentration risk. And short-sellers have flocked for a chance to short this $4.4 billion stock, ratcheting its short ratio to 13.59 as of this morning.
Even though Harris earns 76% of its revenue from the U.S. government, though, the firm’s sales are actually much more fragmented, broken down into more than 200 federal agencies and programs. That diversification is a more telling number than Uncle Sam’s total contribution to Harris’ sales -- after all, program budgets are evaluated case-by-case rather than wholesale.
At the same time, many of Harris’ product offerings are mission-critical communications devices that are used by everyone from troops in Afghanistan to FAA air traffic controllers; these aren’t programs that can be eliminated without jeopardizing safety and security.
But Harris is cognizant of the concerns that investors have about excessive exposure to the government’s checkbook. The firm has been working hard to expand its customer base in the last few years, expanding its offerings for commercial, police, and EMS as well as sales to other governments.
That focus should help shake out some shorts as we approach the new year.
Harris shows up on a list of 9 Stocks With Low Volatility, High Dividends.
Business software maker NetSuite (N) is focused on providing its customers with an integrated, cloud-based financial management system for subscription fees. The company’s platform handles everything from accounting functions to inventory management to customer relationship management -- it’s an integrated approach that resonates with small and medium business clients who are looking for a one-stop shop for their enterprise software.
The fact that NetSuite earns recurring revenues through subscription fees is also attractive. While customer acquisition remains expensive, retention is dirt-cheap for NetSuite -- that should be a major factor in the firm’s profitability going forward. To date, profitability has been one of the biggest black marks against this firm. In a decade of operations, the company has failed to turn a profit; the argument for near-term losses as a price for longer-term profitability starts to lose its luster after a few years.
That said, growth has remained breakneck, justifying the losses NetSuite has been incurring. The firm would be able to deliver positive earnings if it opted to scale back its costly customer acquisition strategy.
Financially, NetSuite is in good shape, with no debt and a fairly large cash position. That clean balance sheet is a major redeeming factor in the interim. Ultimately, short-sellers have been focusing too hard on the bottom line, bringing its short interest ratio to 10.83. The fact that NetSuite is capable of “flipping a profit switch” shouldn’t be going unnoticed.
Recent IPO Fusion-IO (FIO) is another firm that’s shaping up as a solid technology sector short squeeze candidate right now. The firm’s short interest ratio currently rings in at 13.45, but more telling is the sheer number of available shares of FIO that are being shorted. Right now, 55% of Fusion-IO’s float is being shorted -- that scarcity could be a major factor in a squeeze.
Fusion-IO is in the computer storage business, offering solutions that increase the throughput of storage devices. With the popularity of served content (be it a move on Netflix (NFLX), or one of the enterprise platforms offered by the companies on this list), the biggest bottleneck isn’t storage capacity anymore -- instead, it’s the speed at which we’re able to access data. Fusion-IO’s solutions bring processing closer to the data itself, essentially “widening the tubes” that the data travels through.
While IPOs have been under considerable pressure in 2011, that’s not a good enough reason to be shorting Fusion-IO. This firm has been generating consistent growth and admirable profitability in the last few years – and its offering left it with a massive hoard of cash and no debt. The huge percentage of FIO’s equity float that’s currently short provides an excellent catalyst for a meaningful short squeeze.
2011 has been a stellar year for Rackspace Hosting (RAX). Shares of the $5.7 billion managed hosting provider have rallied more than 37% so far year-to-date. The firm’s short interest ratio of 9.12 means that it would take two weeks for short sellers to cover their positions at current volume levels.
Rackspace is one of the biggest names in the managed hosting and cloud computing businesses, providing exposure to some of the strongest trends in the tech sector. Even so, hosting is generally a less attractive business today than it was when the firm was founded more than a decade ago. Today, it’s a commoditized business with minimal barriers to entry – to stand out, Rackspace has worked to carve out a niche.
Rather than offering vanilla hosting solutions, Rackspace has instead focused on marketing its abilities to host more complex SaaS and multimedia websites, as well as its ability to provide a higher level of tech support than its peers. The firm’s large enterprise customer base should provide ample cross selling opportunities as the cloud computing market matures.
To see this week’s short squeezes in action, check out the Tech Sector Short Squeezes 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.