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5 Uptrending Stocks With Short-Squeeze Potential - 18304 views
BALTIMORE (Stockpickr) -- On a regular basis, we take a look at attractive short-squeeze opportunities that are springing up in the market. Remember, 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.
This week, we’re taking a look at stocks that are exhibiting short seller kryptonite: an uptrend. Stocks moving higher are particularly painful for short-sellers because they threaten bearish conviction in the stock, increase the overall cost of the trade, and even threaten to bring on the dreaded margin call.
With all of those factors in mind, it makes sense to look at the heavily shorted issues that have been moving significantly higher in the last several months.
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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 months.
With that, here’s a look at uptrending stocks with short squeeze potential this summer.
36.6%. That’s how much short-sellers of Cerner (CERN), one of TheStreet Ratings' top-rated health care technology stocks, have been hit over the course of the last six months. This $10 billion health care IT firm has seen that ascent as the result of double-digit sales growth and increased efficiency numbers that have ultimately boosted Cerner’s bottom line.
Still, shorts remain lodged in shares of this stock -- with a short interest ratio of 12.9, it would take short-sellers nearly three weeks to unload shares at current volume levels.
Cerner’s software platform offers health care facilities increased efficiency, more portability and lower cost than traditional paper recordkeeping -- and under a number of health care reform initiatives, the requirement to shift to electronic medical records has been legislated into effect.
That’s a good factor in Cerner’s favor as the company works at building up its base of clients. Because Cerner’s system is proprietary, switching costs are high for facilities. That means that Cerner’s customer base is incredibly sticky.
Now Cerner is looking to smaller practices for sales opportunities, showing physicians how its Millennium platform can cut down on the time it takes for them to get paid -- and meet their needs to shift to electronic records. While competition is strong for Cerner right now, shorts are likely overblown.
One big bet against the shorts comes from Edward Owens at Vanguard Health Fund, which had a 3 million-share position in the stock as of the most recently reported period.
There are plenty of reasons not to like the car dealership business right now. From incredibly high capital requirements to a dependence on lenders and consumers’ desire to pile on new debt, there are a lot of factors that make this a tough industry. In many cases, those came to a head in 2008, when dealerships were closing en masse.
It should come as no surprise that since then, investors have been reticent to accept the auto dealership business. But just as there are a number of reasons to be wary of most auto dealer stocks, there are also a number of reasons to like AutoNation (AN).
AutoNation is a $5 billion dealer that operates 242 new vehicle dealerships located in 206 locations spread throughout 15 states. As such, the company is the largest auto dealer in the U.S. While many of AutoNation’s competitors are beholden to a single manufacturer, this firm’s diversified portfolio of dealerships comprises 31 brands that include American, European and Asian manufacturers.
Because of its sheer size, AutoNation gets to play by different rules than other dealers -- economics of scale are massive for the firm, which sports much deeper margins than peers.
On the whole, the company’s balance sheet is decent, and its liquidity is excellent. Regardless, a short interest ratio of 13.1 means that it would take short-sellers nearly three weeks to cover their positions at current volume levels. With shares already up 30% in the last six months, shorts could get squeezed hard on any acceleration of the trend.
Big bullish bets on AutoNation as of the most recently reported quarter come from such heavyweights as Sears' Eddie Lampert -- the stock comprises 19% of the total ESL Investments portfolio -- and Bill Gates, who holds shares in both his Cascade Investment and Bill and Melinda Gates Foundation Trust portfolios.
Now on to another No. 1 stock for its industry: Hanesbrands (HBI), which shows up on an April list of 8 Consumer Stocks With High Buy Ratings. As the biggest manufacturer of basic apparel and undergarments, the company has really succeeded with its marketing message to the American public in the last few decades, signing on high-profile endorsements from the likes of Michael Jordan and the ever-controversial Charlie Sheen. Shares have seen 27% gains in the last six months as a result of strong fundamental performance.
Not surprisingly, though, there are serious blemishes on the company that have spurred a short ratio of 10.7 in shares. Those factors include a heavy debt load, outsized customer concentration and rising raw material costs. Even so, heavy cash flow generation abilities should be the biggest factor in helping the firm cope with those detractors.
So should the company’s brand name. With stickier customers than most of the apparel industry are afforded, Hanesbrands benefits from increased pricing power compared with many of its peers. Strong performance should keep the rally going in shares.
Counting on that is Buckingham Capital Management, which owned 2 million shares of Hanesbrands as of the most recently reported period. The stock comprises 2.6% of the total Buckingham portfolio.
Illumina (ILMN) manufactures tools used for genetic analysis. Shares have rallied 30% in the last six months thanks to innovation-driven breakneck sales growth. But while new products are being snapped up by Illumina’s customers, short positions are also being snapped up by investors right now. With a short ratio of 12.8, it would take nearly three weeks of exuberant buying for shorts to cover their positions at current volume levels.
One of the most attractive things about Illumina’s business is the fact that most of its offerings are consumable. In other words, they’re used in the process of collecting and analyzing genetic material and then discarded. That means that Illumina has a large installed base of recurring revenues as customers repurchase supplies for their devices.
With a healthy balance sheet and impressive business line, this stock should continue to do well as long as it watches out for competition from the big medical device names.
On the long side of Illumina as of the most recently reported quarter is Shumway Capital Partners, with a 1.8 million-share position in the stock.
Shares of Idexx Labs (IDXX) have moved 30% higher in the last six months, putting their move in line with the other stocks on this week’s list. The company, which manufactures medical diagnostic products and pharmaceuticals for animals, is a unique alternative to the traditional health care plays that most investors look at. Because Idexx focuses on veterinary medicine, demand for its products isn’t impacted by health care regulation, and payments are much clearer given the absence of third-party payers.
The tools and products manufactured by Idexx aren’t relegated to pet use -- they’re also used to treat livestock and work animals. But the real growth for Idexx comes in penetrating veterinary offices that primarily serve pets. That’s because health spending decisions for livestock is more about economics, something that isn’t the case in pet medicine.
As a major innovator in the veterinary medicine market, expect Idexx Labs to see continued success -- and the potential for a short squeeze to increase. With a short ratio of 21.5, it would take nearly a month for short sellers to cover their positions at current volume levels.
To see this week’s short squeezes in action, check out the Uptrending Stock 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.