Stocks with strong fundamentals that temporarily have fallen out of favor and that have a high level of short interest can be candidates for a short squeeze when the market sentiment changes. Short squeeze happens when there is a rapid increase in the price of heavily shorted stock, which causes short sellers to close out their short positions driving the stock to move much higher.
I have searched for tech stocks with a high level of short interest that generate strong free cash flow, have a low forward P/E and a low debt. I used the Portfolio123's powerful screener to perform the search. The screen's formula requires all stocks to comply with all following demands:
- The stock does not trade over-the-counter (OTC).
- Sector is Technology.
- Forward P/E is less than 15.
- Price to free cash flow is less than 20.
- Total debt to equity is less than 0.50.
- Short interest as a percentage of float is greater than 15%.
As a result, only four stocks came out as shown in the tables below. In my opinion, these stocks can reward an investor a strong capital gain if the sentiment toward the stocks changes. I recommend readers use this list of stocks as a basis for further research. All the data for this article were taken from Portfolio123 and finviz.com, on February 25, before the market open.
Conversant, Inc. (NASDAQ:CNVR)
Conversant is the leader in personalized digital marketing. The company offers a suite of products and services that enable marketers to advertise and sell their products and services primarily through online and mobile display advertising, affiliate marketing, and comparison shopping channels.
Conversant's short interest as a percentage of float is quite high at 18.65%, which indicates that many investors are quite bearish on the stock, but the short interest was higher three months ago at 22.55%. Conversant's valuation metrics are very good, and it has recorded strong average earnings growth during the last five years of 20.80%. Furthermore, the company beat EPS expectations by 18% in its latest quarter and earnings estimates have been moving higher for the company. At the beginning of this month, the company launched its largest-ever marketing campaign, highlighting its leading capabilities in personalized digital marketing and sharing its vision for the future. According to the company, this marks an exciting step forward for Conversant and the early response from customers and prospects has been very positive. Conversant expects that its investments in this initiative during the first quarter will pay dividends in the balance of 2014 and beyond. In my opinion, there is a reasonable chance for a short squeeze of CNVR stock due to its strong free cash flow, strong fundamentals and robust earnings growth prospects.
Cirrus Logic Inc. (NASDAQ:CRUS)
Cirrus Logic, Inc., a fabless semiconductor company, develops analog and mixed-signal integrated circuits for a range of consumer and industrial markets.
Cirrus Logic's short interest as a percentage of float has increased from 19.12% three months ago to 24.43% at the beginning of this month. Nevertheless, Cirrus Logic beat EPS expectations by 16% in its latest quarter and earnings estimates have been moving higher for the company. Cirrus Logic has compelling valuation metrics, its price-to-free-cash-flow ratio TTM of 4.35 is one of the lowest among all tech stocks. Cirrus Logic has also recorded exceptionally strong revenue and earnings growth, its combined revenue and earnings growth average for the last five years was one of the highest among all tech stocks.
On February 13, Cirrus Logic announced that it is extending its portfolio of market-leading portable audio ICs with a new line of voice processors for mobile applications. According to the company, voice-enabled interface features will continue to fuel growth in mobile devices yet will require superior signal processing technology to give consumers an exceptional user experience, and Cirrus Logic provides complete IC solutions that leverage its audio DSP hardware and advanced SoundClear embedded software to ensure superior voice performance. As in the case of Conversant, I think that there is a reasonable chance for a short squeeze of CRUS stock due to its strong free cash flow and strong fundamentals.
Ebix Inc. (NASDAQ:EBIX)
Ebix, Inc. provides software and e-commerce solutions to the insurance industry. The company operates data exchanges, which connect various entities within the insurance markets and enables the participant to carry and process data from one end to another in the areas of life insurance, annuities, employee health benefits, risk management, workers compensation, and property and casualty insurance.
Ebix has an extremely high short interest as a percentage of float of 45.11%, and it even had a higher percentage of 49.25% three months ago. But Ebix has also extremely good valuation metrics; its price-to-free-cash-flow ratio TTM is only 12.52, its forward P/E is very low at 10.75 and its debt to equity is low at 0.15. Ebix has recorded exceptionally strong revenue and earnings growth of about 35% on average for the last five years, and it has very strong earnings growth prospects. Furthermore, the stock is currently in a strong uptrend; The EBIX stock price is 13.16% above its 20-day simple moving average, 14.01% above its 50-day simple moving average and 21.54% above its 200-day simple moving average. With such a high short interest and the stock being in an uptrend, there is a good chance for a short squeeze of EBIX stock.
j2 Global, Inc. (NASDAQ:JCOM)
j2 Global, Inc. provides services to businesses and consumers through the Internet worldwide. The company operates in two segments, Business Cloud Services and Digital Media.
j2 Global short interest as a percentage of float has increased from 20.62% three months ago to 22.43% at the beginning of this month. Nevertheless, JCOM beat EPS expectations by 3% in its latest quarter and earnings estimates have been moving higher for the company. j2 Global has good valuation metrics and strong earnings growth prospects. Furthermore, JCOM stock is currently in an uptrend; The JCOM stock price is 6.26% above its 20-day simple moving average, 4.09% above its 50-day simple moving average and 5.54% above its 200-day simple moving average. On February 20, Zacks added the stock to its Rank #1 (strong buy) list. In my opinion, there is a reasonable chance for a short squeeze of JCOM stock due to its strong free cash flow, good fundamentals and strong earnings growth prospects.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.