Highly shorted stocks can be good long picks if share prices move up forcing margin calls. A stock with a highly shorted float though, does not mean that a stock will rise. Companies with declining revenue and profit margins may be shorted while the book value continues to erode and shareholder equity diminishes. But when such stocks reach new price highs, the potential for a quick price advance is present. (Also have a look at 21 Long Ideas on the 52 Week High List)
To find possible popping candidates we will look at stocks making new price highs with a high short percent. We will also look at the short ratio to compare daily volume to share covering periods. (If you prefer small caps, check out these 14 Small Value Stocks Ready to Rock the Market)
Highly Shorted Stocks Making New Highs (short data by Yahoo)
CTCT - Constant Contact has 42% of its float short (Yahoo data). With the current average daily volume it would take 36 days to cover this. If prices breakout out above $32, there may be some extremely wild price action.
FSLR - First Solar has the float short of 28%, but this would only take 10 days to cover at current volume trading levels. No doubt much of this is due to speculation that Europe's subsidizing could dry up thus correcting share prices by 25%. If an announcement comes out to the effect that future subsidy is secured, watch out!
MAKO- Mako Surgical Corporation is in the middle of a huge price advance, no doubt in part to some massive short covering. While 33% of the float was short as of Jan.31st, I'd be interested to see how far that dropped by next week. The short ratio was 12 days. The 6.8 million shares short could theoretically be covered by a trading day of well over 10 million shares. This one may have already left the boat, but that remains to be seen.
Other NASDAQ stocks with high short percent making new highs:
|Ticker||Float Short %||Short Ratio (days to cover)|
What To Look For in These Highly Shorted Stocks
A fundamental change such as an analyst upgrade, increased forecast, or earnings surprise could all provide the impetus necessary for a bullish move up followed by a large amount of short covering. (If you like stocks moving up on momentum, read about these 5 Undervalued Stocks With Upside Momentum)
Furthermore, look for prices to breakout past previous resistance levels. JOSB is one example of a stock making a cup formation that is toying with a breakout. Other stocks like INWE shot past $7.50 resistance on big volume, no doubt aided by short covering.
Also, are you wondering if you missed the boat? If you have a pick, look to the total shares short, or how many days it would take to cover, and then simply look at the volume spike since the breakout. For instance, MINI has not seen a massive spike in volume even as prices shot from $21 - $22. Although the short % isn't terribly high, the amount of days to cover is very large at almost 32. If and when the shorts start to cover, this could really rocket.
Just remember, stocks are shorted for a reason. Short sellers are not always right, and they need to cover at some point in time. Making money off their covering shares requires that you buy at the right time when news or price action may force their hand. Simply going against short-sellers in the hopes of a pop without any technical or fundamental action to back it up is high risk strategy I'm not willing to take.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.