7-22-08

On July 15, the Securities and Exchange Commission issued an emergency order to enhance investor protections against "naked" short-selling in the securities of Fannie Mae (FNM), Freddie Mac (FRE) and primary dealers at commercial and investment banks. If the SEC continues crackdowns on selling short without borrowing the securities, this may create some interesting short-squeeze opportunities.

A short squeeze takes place when a stock's short-sellers cover their positions quickly when good news boosts the price of the stock. This short-covering often drives the stock price even higher. The metric for measuring short-squeeze plays is the short ratio, which represents the number of days it would take a stock's short-sellers to cover their position based on the stock's recent average daily volume.

With this in mind, at Stockpickr.com, we've compiled a list of the top Nasdaq short-squeeze plays for July.


A Nasdaq-traded stock with one of the highest short interest is CoStar Group (CSGP), which has a short ratio of 40.3. This real estate information services company just announced that its quarterly net income was up 363%, and it raised its earnings outlook for 2008. The stock has a P/E of 46 and pays a yield of 1.4%.

CoStar is owned by the Janus Venture Fund, which has a Morningstar rating of four stars and is managed by William Bales. The fund has had an average annual return of 23.55% over the last five years. Other stocks in its portfolio include Ultimate Software Group (ULTI), which has a short ratio of 11.2; Equinix (EQIX), with a short ratio of 9.0; and Jarden (JAH), with a short ratio of 14.

Another Nasdaq-traded stock with a high short interest is National Western Life Insurance (NWLIA), a provider of individual whole life, universal life and term insurance plans, and annuities, which has a short ratio of 38.9. A.M. Best just affirmed its financial strength rating on the stock of A- (Excellent), and issued a credit rating of "A-" for the company. The stock has a P/E of 9 and pays a yield of 0.2%.


National Western is owned by Tweedy Browne, a $13.5 billion investment partnership based on the Graham-Dodd approach to investing. The firm was founded in 1920, and it also owns American International Group (AIG), with a short ratio of 1.9; SK Telecom (SKM), with a 4.0 ratio; and Transatlantic Holdings (TRH), with a 3.0 ratio.

Portfolio Recovery Associates (PRAA) is another heavily shorted Nasdaq stock, with a short ratio of 34.9. The company is involved in the purchase, collection and management of portfolios of defaulted consumer receivables. It announced that it just agreed to acquire MuniServices, which specializes in revenue enhancement for governments. The stock has a P/E of 12 and a PEG of 0.84.

Portfolio Recovery shows up in the portfolio of Second Curve Capital, an $800 million hedge fund managed by award-winning stock analyst Tom Brown. Also in its portfolio is Capital One Financial (COF), with a short ratio of 5.3; RenaissanceRe Holdings (RNR), with a 2.4 ratio; and Montpelier Re Holdings (MRH), with a 14.8 ratio.

For more Nasdaq stocks with hight short interest, check out the Top Nasdaq Short-Squeeze Stocks at Stockpickr.com.

A note from James Altucher:

Every weekend I send an email to Jim Cramer and several hedge fund managers about the most interesting portfolios posted on Stockpickr that week. Usually those portfolios not only list stocks according to a theme but also offer significant analysis as to why the stocks are cheap.

Here are some examples:

Stocks related to drilling the Marcellus Shale

MLPS with yields above 7%

Microcaps trading for less than tangible book

Stocks that do well after Hurricanes

Here's the challenge: Build a portfolio at Stockpickr.com with great analysis, and send me the link. Each great portfolio (with analysis) will get posted on TheStreet.com with your byline (as a "Stockpickr Guest Columnist") and will be included in my email I send to Jim and the other
hedge fund managers on my list.