Monday, March 07, 2005

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.)

3 Comments:

Anonymous Cristina Yu said...

Really interesting. I read this Oct 25, 2005 and found that many of these would have been great trades, some long, some short! One thing that stands out is that stocks with such high short ratios are pretty volatile. Naturally, you can't make a decision on how or whether to trade based just on the criteria you mentioned, but those were definitely stocks to take a look at. Thanks for posting.

7:18 PM, October 25, 2005  
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4:39 AM, October 31, 2005  
Anonymous Penny Stock Newsletter said...

I have always favored value stocks over growth stocks. Because their is a little extra margin of safety that value investing gives you compared to growth stock investing Growth stock investing is all about the future expectations of a company. Value investing is about the current value of a stock. This does not mean that their are not any growth stocks that are not great investments.

10:18 AM, February 01, 2012  

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