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WINDERMERE, Fla. (Stockpickr) -- If you want to see how powerful a short-squeeze can be, then take a look at the chart for Travelzoo (TZOO) over the last two months. Shares of the global Internet media player soared from a low of $36.16 a share to a recent high of $103.80 before settling back down to current levels of around $85. This is one heck of a move in a very short timeframe, and it probably would have never happened had the stock not been so heavily shorted.
As of March 31, the current short interest as a percentage of the float for Travelzoo is 35.2%. That’s a huge short interest for a stock that only has 5.5 million shares in its tradable float. This ridiculously small float is another major reason that Travelzoo skyrocketed. Once the momentum buyers stepped in, it became very easy to squeeze the shorts. They simply overwhelmed the bears with continuous buy orders that increased in volume as the stock rose.
One thing about a short squeeze that you don’t hear about often is that if there aren’t fundamentals to support the move, the stock will eventually round-trip and give back all the gains. Understanding this will help you in deciding if you should hold a heavily shorted stock for longer than just a trade.
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I am not sure which one Travelzoo is just yet, because we have seen this stock round-trip many times in the past. But Travelzoo did report revenue of $37 million on 37 cents a share in profits during the most recent quarter, which was a jump of 30% from a year ago.
I will save the debate on Travelzoo for another time. I do think it's always prudent take some profits in a stock that has run up that much in just two months. What I would rather do now is look for the next Travelzoo that could produce huge profits off the demise of aggressive bears caught short the wrong stock.
With this in mind, let’s take a look at a number of heavily shorted stocks that could easily see a massive short squeeze like Travelzoo's.
Sirius XM Radio
One stock that could easily make a percentage move that is equal to or greater than Travelzoo's is Sirius XM Radio (SIRI), which is engaged in broadcasting music, sports, news, talk, entertainment, traffic and weather channels in the U.S. on a subscription fee basis through its two satellite radio systems. The stock is off to a solid start so far in 2011, with shares up around 19%.
Shares of Sirius XM Radio recently hit $2 a share for the first time since 2008. This is a huge technical development, because it could mean that the stock is gearing up to make a big run back towards its 2004 high of $7.50 a share. The main reason I see so much potential upside in Sirius, is because as the stock has been uptrending for the past year, the bears have been increasing their short bets substantially. Nothing is worse for a short-seller than adding to a short as the stock just keeps rising. Now that Sirius has hit $2 those bears have to be getting a bit more nervous since it’s been quite a long time since the stock traded at this level.
The company is due to report earnings on May 3, and Wall Street is looking for growth of 200% for the current quarter and 200% for 2011. If Sirius can offer any growth numbers that come in above those estimates, then this stock is going to explode. Other upcoming catalysts for Sirius include any favorable results on a lawsuit that would allow the firm to raise subscription rates, as well as improving car sales figures from General Motors (GM) when it reports earnings on May 5. Ford Motor (F) just released its results on Tuesday and easily exceeded Wall Street estimates.
The current short interest as a percentage of the float for SIRI sits at around 7%. The bears have been adding big to their positions from the last reporting period by around 3.9%, or by 10 million shares, as of March 31. The total amount of shares sold short on SIRI is a whopping 265.45 million out of the 3.87 billion shares that are available in the traceable float. That’s a lot of shares that will be exposed to short-covering risk if this stock wants to keep uptrending.
Another heavily shorted stock that has the potential to rip higher is Avanir Pharmaceuticals (AVNR), a pharmaceutical company focused on developing and commercializing therapeutic products for the treatment of central nervous system disorders. This stock is basically flat on the year, with shares up only about 1%.
This biotech player recently received FDA approval for its drug Nuedexta, which treats the pseudobulbar affect or emotional liability seen in neurodegenerative diseases such as amyotrophic lateral sclerosis, multiple sclerosis and Alzheimer’s. The drug obviously has great potential, and what’s great about shares of Avanir is that since the drug is just starting to hit the market, you can get in early before its growth really kicks in.
Of course, with all small-cap biotech stocks, there’s a big risk as to whether or not management can execute its business plan around a new drug and gain acceptance among doctors and patients. Luckily for Avanir, the company has $117.66 million in cash on its balance sheet and zero debt, so it has ample resources to ramp up its sales force and marketing to create a buzz for the drug. Ultimately, though, the drug will sell only if it works, so I would advise following early prescription data as it hits the wires.
One major positive for Avanir is their recent hiring of William Sibold to the position of senior vice president and chief commercial officer. This is a huge move because in the past Sibold has worked on such big drugs as Prozac, Avonex and Tysabri.
Related: 4 Biotech Penny Stocks to Buy
The current short interest as a percentage of the float Avanir is a ridiculously large 25.1%. The bears have also been increasing their bets from the last reporting period by around 2.5% or by 742,000 shares as of March 31. This stock could easily double or more from current levels if management doesn’t drop the ball.
I would be a big buyer of this stock if it trades above $4.40 to $4.53 a share, which marks some past overhead resistance levels where the stock has failed at recently. I would add heavily if the stock moves above $5.80, which is the price the stock hit right after the FDA approved Nuedexta. Any more above $5.80 should setup this stock for a run to $10 or possibly even higher.
Avanir also shows up on Jake Lynch's recent list of 5 Stocks With the Largest Short Interest.
China North East Petroleum
Another name with the potential to move much higher from current levels is China North East Petroleum (NEP), a non-state-owned oil production company that engages in oil drilling project management and the extraction of crude oil in proven oilfields in Northern China. China North East operates four oilfields with over 247 wells. This stock is down 30% so far in 2011, but consider that a gift because the upside potential is gigantic.
The bull case here is pretty simple to understand. Rising crude oil prices are now easily above $100 per barrel, and the unstoppable demand for energy out of China can only lead to good things for NEP. However, the stock has fallen sharply this year due to some concerns from short-sellers. You can view the company’s response to one of the bears here.
One major positive for NEP is the fact that it has no marketing or sales costs. China North East currently has a contractual guarantee to sell all oil it extracts to China oil giant PetroChina (PTR). When you consider that PetroChina is one of the biggest companies ($269.22 billion market cap) in the world, then you can understand that this deal is a good one. There’s little risk of not receiving payment when you’re dealing with one of the world’s best-of-breed energy players in PTR.
Another thing to love about NEP is the fact the company is cash-rich, with about $60.97 million of cash on its balance sheet and only $3.98 million in debt. The book value per share on this stock is $3.74, which makes it very cheap since shares are currently changing hands at around $3.92. If the bears are wrong or just misguided here, then this stock has tremendous upside.
Currently, the short interest as a percentage of the float for NEP sits at around 9.8% as of March 31. The tradable float for NEP is 20.48 million, so that means around 2.23 million shares are currently sold short. This low float and high short interest is a great recipe for a massive short-squeeze if the bulls return to this stock anytime soon. Keep this name on your trading radar.
If you’re looking for semiconductor player that could short-squeeze huge, then take a look at Rubicon Technology (RBCN), an electronic materials provider that develops, manufactures and sells monocrystalline sapphire and other crystalline products for light-emitting diodes, radio frequency integrated circuits, blue laser diodes, optoelectronics and other optical applications. This stock is off to a red-hot start in 2011, with shares up about 35%.
During the company’s last quarterly report, Rubicon saw revenue rise an impressive 44% to $29.5 million. Rubicon is now due to report earnings on May 5, so key off of that report to see if it can continue to deliver solid results. Recently, UBS raised its price target on the stock to $38 from $30, citing strong Chinese demand and increased customer utilization.
The all-time high on Rubicon is right around $35 a share, so we could easily see a Travelzoo-type move if the stock takes out that level anytime soon. The current short interest as a percentage of the float is a massive 50.4%. It would take the bears 10 days alone to cover all of those short bets, so this stock could easily explode under the right circumstances.
Rubicon was one of JPMorgan's 13 favorite stocks for 2011.
Two more heavily shortednames that operate in the same sector as Rubicon are Cree (CREE) and Veeco Instruments (VECO). Cree has a current short interest as a percentage of the float of 21.5%, and Veeco Instruments has a very large short interest of 29%.
Rubicon and Vecco are the strongest technically of the three, with both stocks trading about four to five points off of their 52-week highs. What’s great about Veeco is that this stock once traded as high as $120 a share. If it can take out three-year highs of $54.40, then it could be well on its way to much higher prices.
Cree has traded as high as $105 a share in the past, but the technical picture for this LED player just isn’t as bright as the other two. All three are worth watching, though, for a Travelzoo-style short squeeze in the future.
To see more heavily shorted stocks with the potential for big short-squeezes, check out the Heavily Shorted Stocks portfolio on Stockpickr.
-- Written by Roberto Pedone in Winderemere, Fla.
At the time of publication, author had no positions in stocks mentioned.
Roberto Pedone, based out of Windermere, Fla., is an independent trader who focuses on stocks, options, futures, commodities and currencies. He is also an outside contributor to Beconequity.com and maintains the website Maddmoney.net, which he sold to Blue Wave Advisors in 2008. Roberto studied International Business at The Milwaukee School of Engineering, and he spent a year overseas studying business in Lubeck, Germany.