Five stocks primed for a short squeeze
Holding a long position in a stock during a short squeeze is one of the most thrilling and profitable things an investor can do. The actual profit to be made in a short-squeeze varies a great deal, of course, from almost none to arbitrarily high, and in that way, its effect is similar to that of holding stock in a company when it is suddenly bought out at a premium. The later is rare enough that unless one is blessed with preternaturally keen insight, attempting to buy stock just prior to a buyout is frustrating and generally profitless.
The short-squeeze, on the other hand, is comparatively common, but comes with an automatic risk factor: to profit from a short-squeeze, you must buy stock in a company that large segments of the market are betting against. Of course, that makes the eventual win, if it does come, that much sweeter. This week, our analysts have identified five stocks that have all the essential pre-conditions in place for a big, perhaps even epic, short-squeeze, which are as follows:
- A high percentage of the public float sold short. This is just what it sounds like. If there are 10K shares in the float, and 3K have been short sold, the short interest is 30%.
- A small float. A high short percentage doesn't generally lead to a short-squeeze when a stock is widely held and highly liquid, as such stocks almost always trade in an orderly manner. The short-squeeze is very much a means of exploiting market disorder.
- A high short ratio. The short ratio depends on both the short percentage and the stock's liquidity. It is equal to the number of shares held short, divided by average daily volume of trading in the stock. A short position begins to look significant enough to cause a short-squeeze at (very roughly) 2 or higher, though the ratio can climb far higher than that. Of course the number of days it will actually take for all those who hold a stock short to cover will not be as large as the short ratio, because as the squeeze begins, trading volume will rise, and this is just what those long the stock want to see happen: a volume of selling that will overwhelm what the market makers in the stock are prepared for.
There is one final, intangible precondition—the company must over-perform current expectations—or in some other way prove itself a good buy—in order to start the buying needed to begin the squeeze. On this, there are no guarantees, but to help steer you in the right direction, our analysts have identified for these trades the strongest looking companies with high short positions, not the companies with the highest short positions. Despite this important distinction, we point out that we are looking for high returns from these stocks over period of weeks or months, and such potential invariably comes with high risk. These are speculative buys and should be weighted accordingly in your portfolio.
Shutterstock (SSTK) Short%: 8.4% Float: 24.51M Short Ratio: 7.9
Shutterstock provides digital imagery online, of the sort used to decorate and enhance online articles. A profitable company with rising revenue, Shutterstock isn't a typical stock for short-sellers to pick on, and as you can see, in this case it is not a huge short percentage that is creating the high short ratio, but the low average daily trading volume. It could be said that the trailing P/E of 26 is a bit high, but for a company that has a profit margin of 26% and a return on equity of 180%, it seems very much in line. Though it's business model seems easily replicable, the company offers a great deal of content. This one could be held for growth if the short position doesn't produce a pop.
AEP Industries (AEPI) Short%: 8.8% Float: 3.29M Short Ratio: 17
AEPI is a maker of custom film—not the sort shown at Sundance, but the plastic variety. Their product is used in distribution of food as well as in many industrial processes. Despite the fact that the short percentage here is, again, not extremely high, the short ratio is huge. The reason for the short selling appears to be simply this: the stock has gone up rapidly, more than doubling in the past year. It is foolish, of course, to sell short for this reason, as doing so ignores the possibility that the rising stock price is a reasonable and measured response to the company's growing strength, rising revenue and rising profits. Such seems to be exactly the case for AEPI. The company's revenue has grown in each of the past four years, and analysts estimate that this year, its EPS will rise 18% from 2012, and will rise an additional 30% in 2014. Though it offers some consumer products, AEPI's business is mostly business to business, and it should be thought of as a cyclical, but unless you are persuaded that the economy is about to crash, that is no cause for worry.
Blythe (BTH) Short%: 57.8% Float: 6.86M Short Ratio: 19.1
Blythe is primarily a catalog/online retailer, though they also offer weight-management products and home décor. The company has been having a rough time recently, as sales from its nutritional supplements and energy drinks segments, comprising the ViSalus Sciences, ViSalus, and Body by Vi Challenge brands, have declined markedly. These brands, distributed through a multi-level marketing network, have caused many to liken BTH to Herbalife (HLF) , though for the present, at least, BTH is not doing nearly as well. In the first quarter of 2013, BTH's total revenue was $233 million, down from $270 million in the year ago quarter. The earnings picture was even worse, as the company posted EPS of $0.16, down from $0.43 in the year ago quarter. The share price of BTH has been headed downward since August of 2012, and there has been an enormous short interest the entire way. Today, the stock trades at $13.27, down from $45 last summer, but rather than take a big win and leave, short sellers have swarmed the stock even more relentlessly and, in our view, gotten way too greedy. A short interest of 57% is extraordinary, and is enough to create a short-squeeze on virtually any good news. Another reason to think we could get a short squeeze here? It has happened before. A short-squeeze in August was good for a bounce of about 33%.
Chart courtesy www.stockcharts.com .
USANA Health Sciences (USNA) Short%: 68.8% Float: 6.36M Short Ratio: 30.7
Perhaps unsurprisingly, USNA is a multi-level marketer of health-care products. So far this year, the stock has doubled in price from $35 to $70 before falling back a bit in the last few days. The Street's loathing of multi-level marketing is truly fierce, as is evident from the stupefying 68.8% short percentage and the massive 30.7 short ratio. What The Street may be missing is that not all multi-level marketing systems follow the path of a balloon, expanding rapidly, seeming to grow larger and larger, and then suddenly ceasing to exist. USNA appears to be organized to achieve sustainable growth, as demonstrated by its revenue, which is increased for the past 10 years in a row. USNA's first quarter 2013 numbers recently came in, showing a larger than ever first quarter profit of $1.28 per share. It would appear all USNA has to do to smash the short sellers is exactly what it is already doing, and if this colossal short position pops, the results could be legendary.
Biglari Holdings (BH) Short%: 13.4% Float: 1.03M Short Ratio:33.8
You may never have heard of Biglari Holdings, as it was The Steak n Shake Company until 2010. The company operates and franchises restaurant chains, including Steak n Shake, Western Sizzlin, Great American Steak & Buffet and Wood Grill. The company's performance has been solid for the past five years, though quite recently, it has taken a 20% stake in Cracker Barrel Old Country Store (CBRL) . With CBRL shares soaring, BH now has a cushion worth $500 million in addition to its own restaurants and franchises. While this is unquestionably a good thing, it also appears to be the reason the company is under attack by short sellers. Cracker Barrel is not pleased by the Biglari investment, and as there seems no sensible reason to short this stock, we speculate that for some enthusiastic investors, love of Cracker Barrel has somehow translated into hatred of Biglari. BH now appears poised to rise both on its own merits, and from the updraft of Cracker Barrel's success, and while the short percentage is not astronomical, the tiny float should make for a powerful rip when and if the shorts have to cove.
