The recent SEC emergency order against naked short-selling in the stocks of investment brokers and commercial banks may create some attractive 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.

Here at Stockpickr, we've come up with a list of the top investment broker short-squeeze plays.

One of the brokers with the highest short interest is Interactive Brokers Group (IBKR), with a short ratio of 10.1. This electronic market maker and investment broker had a 58% increase in its second-quarter profit. The stock has a P/E of 2 and a PEG of 0.85.

Interactive was recently added to the portfolio of Blackstone Kailix Advisors, the hedge fund arm of The Blackstone Group. Other stocks Blackstone added to its portfolio include Mirant (MIR), with a short ratio of 6.6; MF Global (MF), with a short ratio of 3.7; and Rockwood Holdings (ROC), with a 4.2 ratio.

Another heavily shorted broker is KBW (KBW), an investment banking company based in New York, with a short ratio of 11.8. It recently reported an operating net loss of $7.8 million, or 25 cents per diluted share. The stock has a P/E of 65and a PEG of 2.94, and it pays a yield of 6.6%.

KBW is owned by Cordillera Asset Management, a $150 million money manager that handles investments for pension funds and endowments. Cordillera was founded in 1991. It also owns Under Armour (UA), with a short ratio of 13.3; Psychiatric Solutions (PSYS), with a 12.4 short ratio; and BE Aerospace (BEAV), with a 1.7 ratio.

optionsXpress Holdings (OXPS) is another heavily shorted broker, with a short ratio of 10.4. This retail broker reported a 1% rise in second-quarter profit on a 4% increase in revenues. The stock has a PE/ of 16, a PEG of 0.85 and a yield of 1.3%.

optionsXpress is held by the Morgan Stanley Financial Services Fund, a Morningstar-rated three-star fund managed by Mary Maly. The fund has had an average annual return of 12.41% over the last five years. It also holds American Express (AXP), with a short ratio of 1.6; Fannie Mae (FNM), with a 1.2 ratio; and Greenhill (GHL), with a 15.2 ratio.

For more heavily shorted brokers, check out the Top Investment Broker Short-Squeeze Plays portfolio.



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.


Published July 29, 2008