The S&P 500 is a stock tracking index that tracks the prices of 500 stocks with the largest market capitalizations trading on either the New York Stock Exchange or the Nasdaq. During the last couple of months, the index has bounced off the 800 level, and at a recent level of 845, there may be some short-squeeze opportunities with some of the stocks that make up the Index.

A short squeeze takes place when short-sellers quickly buy in the stock in order to cover their bearish positions, driving the price of the stock 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 has compiled a list of the top S&P 500 short-squeeze plays.

One stock in the index, which is heavily shorted, is Fastenal (FAST), with a fairly high short ratio of 11.9. This translates to a time frame of almost 12 days that it would take the short sellers to cover their positions. The more days to cover, the greater the potential "squeeze."

Fastenal is a marketer of industrial and construction supplies, such as nuts, bolts, washers, screws and studs. It just reported a huge spike in earnings of 11.3% for the fourth quarter of 2008, generating 42 cents per share, beating analysts estimates. The company has a fairly high P/E ratio of 18, which unfortunately is double the industry average for general building-materials stocks. On the plus side, the company is debt-free and has more than $86 million in cash. The company's cash flow and earnings are covering their respectable 2.2% dividend yield several times over.

Fastenal is held by Edgemoor Capital, a Washington, D.C.-based money manager that looks for companies that have low P/E ratios, low price-to-book values, excellent prospects for growth, strong franchise, shareholder-oriented management, consistent free cash flow and high returns on equity. Edgemoor has also invested in Berkshire Hathaway B shares (BRK.B), with a short ratio of 2.4; Devon Energy (DVN), with a 1.5 ratio; and Western Union (WU), with a short ratio of 0.8.

Another heavily shorted stock in the S&P 500 is Quest Diagnostics (DGX), the medical diagnostic testing and services company. its short ratio is a high 10.8. Quest also just reported earnings, reporting a profit for the latest quarter vs. a loss for the same quarter last year. It produced earnings of 87 cents per share, exceeding analysts' estimate of 80 cents per share. Quest has more than $3 billion in debt; however, because the yield is so low at 0.8%, the dividend is well-covered by operating cash flow of more than a billion dollars a year.

Eminence Capital is a New York City-based hedge fund with more than $4 billion under management that happens to own shares of Quest. Eminence also is a shareholder of Oracle (ORCL), with a short ratio of 1.5; Ross Stores (ROST), with a 2.9 short ratio; and American Express (AXP), with a short ratio of 2.2.

For more ideas, check out the Stockpickr portfolio of the top S&P 500 short-squeeze plays.

Posted on Jan. 28, 2009