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Because short squeezes happen most often to small cap stocks with small floats, we decided to run a screen for micro to small caps that could get squeezed in 2011.

We screened for companies with a market cap under $1 billion, and with a short float of 30% or higher, which means that for all shares available for trading (the float), 30% or more of those shares are “borrowed” to sell short.

We then culled down the group further by finding stocks with positive insider transactions in the last six months, giving us an idea that management thinks shares are undervalued, and a current ratio of over 0.5, a solid indicator the company can cover short-term obligations.

In our first article from Dec. 2 “Are Shorts Right About These 6 Stocks,” we listed six companies that could get squeezed. Here’s how they’ve performed to date: Corinthian Colleges (COCO): +31.69%, ATP Oil & Gas (ATPG): +14.36%, Power-One (PWER): +6.8%, The Great Atlantic Pacific Tea Company (OTC:GAPTQ): -93.3%, Barnes & Noble (BKS): +20.82, Alliance Data Systems Corp (ADS): +7.6%.

Not bad, with the exception of GAPTQ.PK (and on this one, we did state that we thought “a turnaround in the business and in shares [was] unlikely.”)

So with that track record in hand, here are 7 stock with high short interest that could squeezed in 2010…

ATP Oil & Gas (ATPG): This offshore driller made it on our list again. We’re even more bullish on ATPG than in the past and have harped upon the long-term prospects for this leveraged oil and gas company here.

ATP's positive performance doesn’t mean the shorts have let up. Shares short as a percentage of the float at the time of writing is 39.93%, down almost 7% since the beginning of December. Why? Oil’s recent price appreciation and the unrest in the Middle East have something to do with it. But we think ATPG still has more room to run on the back of increased production as the current administration loosens up its offshore permitting policy and ATP’s pending permits move forward.

China MediaExpress Holding (OTCPK:CCME): CCME is the largest TV advertising operator on inner city buses and airport express buses in China. With strong margins and excellent returns on investment in a fast growing market, why the hate from short sellers?

The culprit, a report put out by Citron Research on Jan. 31, 2010, claiming the company’s growth story is too good be true, the that company is a “phantom” and that "no one in China has ever heard of [China MediaExpress].” CCME has come out defending itself against the piece, and many commentators have pointed out that Deloitte audits the company and that CV Starr’s Hank Greenberg is a shareholder. But that hasn’t stopped the shorts. Short float is 35.17% at the time of writing.

It’s too early to say for sure exactly what’s going on here. If the uncertainty around this issue clears, it’s highly likely the company’s share price could appreciate significantly, albeit with a fraud discount, as a shorts cover their positions. However, if more evidence appears pointing to a massive Enron-style fraud, there is still plenty of room for CCME to fall. Our own due diligence suggests the company is not a fraudulent operation.

Corinthian College (COCO): Another name that’s appeared again on our lists, shorts are still attacking this for-profit college (short float is at 34.08%, up 2.5% since our previous article.) The threat of the Department of Education’s “gainful employment” regulation is largely responsible.

The regulation, expected this quarter, would limit the companies' access to federal financial aid if not enough students repaid loans or if for-profit graduates carried too much student loan debt. But regardless of regulation, we think it’s likely that for-profits will outperform in 2011, aided by an industry-friendly, Republican-controlled House of Representatives. However, in our opinion other names like Strayer (STRA) and Apollo Group (APOL) which we wrote about here will provide better returns for investors.

Hhgregg, Inc (HGG): This retail electronics store has produced excellent cash flow and earnings per share growth over the past five years and it’s been on a tear opening new stores. At the beginning of February, the company issued guidance lowering its 2011 earnings and revenue outlook, citing lower than expected demand for higher end video technology products like 3D and LED televisions. Consumers are instead buying lower-end sets, which puts a strain on the company’s margins. Short float at the time of writing is 32.47%.

While the company is partially filling a void left by Circuit City, Hhgregg operates in an extremely competitive, low-margin niche industry, with Best Buy (BBY) as the world market leader. And while we’d rather own shares of BBY due to its scale efficiencies, should consumer sentiment improve along with the broader US economy, we think its possible that HGG could surprise on the upside leading to decent short squeeze for shareholders.

Life Partners Holdings (LPHI): Life Partners Holdings operates in a profitable and morbid niche: It matches buyers of life insurance policies with sellers of policies. At the time writing, the short float of LPHI is 35.98% and shares are down over 50% since mid-December. The reason behind the decline is a new SEC investigation into the company’s life span data projections, based upon a Wall Street Journal article claiming that “10% or 15% yearly returns promoted to investors may prove elusive for many.” We think that the company operates in a murky industry and has used questionable, and possibly fraudulent, marketing to lure mostly individuals to invest.

In our opinion, we believe it’s likely that shorts are right about this one, and LPHI has a long, painful and expensive slog ahead of it as the SEC unravels the opaque practices used by LPHI and the broader life settlement industry. To add more fuel to the fire, the SEC has previously accused the company founder and CEO, Brian Pardo, of falsifying financial information of his now bankrupt previous enterprise.

The McClatchy Company (MNI): Like every newspaper publisher, MNI has faced headwinds largely because it’s operating in a dying industry. It’s a sad fact, but people don’t buy print like they used to. However McClatchy is the third largest newspaper publisher in the US and has 30 dailies on its roster. We expect more lean years ahead for MNI and the broader industry. As the industry moves from print to tablet/online, however, the big names of the industry will benefit as they still provide some of the best content. Where there’s high quality content, there’s ad revenue to be made. Short float is 31.79% at the time of writing.

PetMed Express (PETS): Quarter after quarter, PetMed continues to disappoint. This mail-order company sells pet pharmaceuticals but is increasing losing market share to larger competitors like Amazon (AMZN), which faces its own concerns here. Short float is 31.26%. So how could shorts get squeezed? It’s hard to come up with a optimistic scenario given the company’s declining metrics, but if the company’s new aggressive pricing strategy, increased advertising allotment and expanded product offerings work and surprise investors, shorts could get squeezed in 2011.

Source: 7 Small Cap Short Squeeze Candidates for 2011