By Stockpickr Staff
Posted on May 22, 2009

The price of gold has been moving up, and the U.S. dollar has been dropping against various other currencies, causing many of the mining shares in the basic materials sector to rise. According to Rev Shark, with oil, gold, commodities and agriculture "running hot and heavy, "we have performance anxiety, a short squeeze and momentum all favoring the upside at this point ."

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.

With this in mind, Stockpickr has reviewed the materials stocks and compiled the Short-Squeeze Plays for Basic Materials Stocks portfolio.

One materials stock with a high short ratio is Westlake Chemical (WLK), the maker of chemicals, polymers, vinyl products and other fabricated products. Its short ratio is 15.5, which means that it would take over 15 days for the short sellers to cover their positions.

Westlake recently reported a net loss of 9 cents a share for the first quarter, compared with net income of 8 cents a share for the same quarter last year. This drop was primarily due to lower product pricing, an ice storm and a reduction in demand. In addition, revenue dropped 26%.
Westlake pays a small dividend of 1%, which is well-covered by its operating cash flow of $334.6 million. Westlake has $510 million in total debt vs. $179 million in cash.

Westlake is owned by the Royce Premier Fund, a mid-cap blend fund managed by Charles M. Royce and rated five stars by Morningstar. The fund ranked in the top 1% of all funds in its category for the last five years. Royce also owns Lincoln Electric Holdings (LECO), with a 5.8 short ratio; Perrigo Company (PRGO), with a 6.8 short ratio; and Endo Pharmaceuticals Holdings, (ENDP) with a ratio of 4.5.

Another heavily shorted materials stock is Minefinders (MFN), with a short ratio of 12.2. This gold and silver mining company is based in Canada but has operations in the U.S. and Mexico.

Last month, the company announced that its gold production increased to about 6,426 ounces in March, up from 5,089 ounces in February, and silver production increased to approximately 121,091 ounces in March versus 111,010 ounces in February. The company has negative operating cash flow of $26 million, total debt of $124.8 million and cash in the bank of $21.2 million

Minefinders is owned by an Idaho based money manager called Sun Valley Gold, which specializes in investing in precious metal mining companies and has more than $350 million under management. It also owns Barrick Gold (ABX), with a short ratio of 0.7; Gammon Gold (GRS), with a 2.6 short ratio; and Novagold Resources (NG), also with a 2.6 ratio.

For more ideas, check out Stockpickr's portfolio of Short-Squeeze Plays for Basic Materials Stocks.

At the time of publication, the author had no positions in stocks mentioned.