Waiting for the Short Squeeze

I base my long-term investment decisions (i.e., WHAT to buy and sell) on fundamentals but also take a look at techincal factors when deciding timing (i.e., WHEN to buy and sell). The short ratio (number of shares short divided by average daily volume) is one of these technicals. A high short ratio can be a precursor to a short squeeze, when unexpected positive news drives the stock price higher and short sellers are forced to cover their shorts to cut losses, thereby further exacerbating the sharp increase in stock price.

Using Yahoo's database, I screened on the following parameters:

Liquidity: Daily trading volume > 50,000 shares
Earnings Positive: Forward PE ratio > 0
Sound financial performance: ROE > 10%

and came up with the following list of companies with the highest short ratios (> 25), also eliminating those companies whose number of shares short as a percentage of float is less than 10%:

Company (Ticker): Short Ratio, Shares Short as % of Float, Current Price

Allied Capital Corp. (ALD): 33, 11%, 27.48
Global Payments (GPN): 31, 18%, 57.82
FPIC Insurance Group (FPIC), 30, 16%, 32.13
Atlas America (ATLS): 30, 52%, 37.80
Affiliated Managers (AMG): 29, 46%, 65.93
Papa John's (PZZA): 29, 23%, 36.56
Mobile Mini (MINI): 28, 13%, 37.73
Irwin Financial (IFC): 26, 17%, 25.15
AMN Healthcare (AHS): 26, 17%, 14.38
Cerner Corp. (CERN): 26, 38%, 52.60
Bank of the Ozarks (OZRK): 25, 28%, 34.68
Duquesne Light (DQE): 25, 12%, 18.98

When the short ratio is high and a significant fraction of the company's float has been sold short, it is possible that improving fundamentals can trigger a short squeeze. The situations with Atlas America and Affiliated Managers, where the number of shares short is equal to about half of the respective floats, look particularly interesting.

I intend to keep an eye on these stocks over the next few months to see whether or not short squeezes result. In many cases, it could be that the short sellers are right and the stock prices will continue to fall with deteriorating fundamentals. On the other hand, if the future is brighter than anticipated by the short sellers and the rest of the market, a few of these stocks could see very sharp price run-ups if a short squeeze materializes.

(Disclosure: I have been long MINI for a few years. This company has a very simple business, basically just owning and leasing storage containers nationwide. MINI's stock price has been rising recently, consistent with its improving fundamentals and accelerating earnings. The conundrum is MINI's persistently high short ratio, which I expect to fall sometime soon when the short sellers decide to cut their losses.)