By Stockpickr Staff
Posted on May 1, 2009


When Citigroup (C) jumped up 2% on April 14, Karen Finerman reported on "Fast Money" that the stock's move was a "fake winner" caused by a "gigantic short squeeze."

A short squeeze occurs when short-sellers quickly buy in shares of the stock in order to cover their bearish positions, driving the price of stocks up sharply. The ratio for measuring short-squeeze opportunities is the short ratio, which is the number of days it would take the short sellers to cover their position based on recent average daily volume.

Stockpickr compiled a portfolio of the top Nasdaq short-squeeze plays, all of which have market caps of more than $250 million.

One Nasdaq stock with a high short interest is NutriSystem (NTRI), the weight-management products and services company, which has a short ratio of 33.1, This means that it would take the short sellers more than 33 days to cover their position.

According to John Reese at RealMoney, NutriSystem is "a small-cap with excellent financials --- an earnings yield of 27% and a return on total capital of more than 78%." This debt-free company has $38 million in cash. The stock even pays a nice high dividend of 4.8%, easily covered by its $92 million cash flow.

NutriSystem is owned by Royce & Associates, a New York-based money management company with more than $18 billion under management. It specializes in investing in smaller companies using a disciplined value approach. Royce also owns Lincoln Electric Holdings (LECO), with a short ratio of 8.3; Knight Capital Group (NITE), with a 2.2 short ratiol; and Endo Pharmaceuticals Holdings (ENDP), with a short ratio of 4.5.

Another heavily shorted Nasdaq stock is the online diamond and fine jewelry retailer Blue Nile (NILE), which has a short ratio of 26.6. Last month, an article in Stockpickr described how the Blue Nile stock showed a very favorable chart. The stock has total debt of less than one million dollars with over $54 million in cash. Earnings and operating margin have been negative.

Blue Nile is one of the top ten holdings of the Morgan Stanley Institutional Small Co. Fund, a three-star Morningstar-rated long-term capital appreciation fund, managed by David Cohen, that invests in small growth companies. The fund currently ranks in the top 3% of all small growth funds for the last three months, and the top 20% for the last five years. Other stocks the fund owns includes Techne (TECH), with a short ratio of 4; Greenhill (GHL), with a 7.1 ratio; and Contango Oil and Gas (MCF), with a 7.9 ratio.

For more ideas, check out the Top Nasdaq Short-Squeeze Plays portfolio.