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A high amount of short-selling may take place in a stock for a few reasons. One may be that analysts may have lowered thier rating or earnings forecasts for a stock. Margins may be sliding and the earning potential for the company is in serious doubt. Such fiscal problems could be either short-term or long-term in nature.

Other times short-sellers will pile onto a stock that has very high-growth prospects.The stock may have high analyst ratings and strong earnings growth forecasts, but the short-sellers feel that the targets are overly optimistic. If the extremely bullish forecasts are missed in the quarterly earnings reports, the share price could quickly recede giving the short-sellers an excellent opportunity to cover.

It is this second group that we want to target. We want to find stocks that are on the rise despite a high amount of short interest. Many of these will be high-growth stocks, while others will be beaten down stocks making a comeback. If buyers readily consume the shares sold short and prices continue to advance, the short-sellers may need to cover at a less than opportune time, creating a ‘short-squeeze’. A very volatile pop can occur. (These 9 Stocks with High Revenue are another great source of high growth stocks to investigate)

Below are 17 stocks with very high short interest. They have share prices that are up 20%+ over the past 3 months and have risen this past week also. The goal is to find some strongly performing stocks where investors have broadly shorted it.

17 Stocks Highly Shorted by Contrarian Investors

Ticker

Company

Float Short

Short Ratio

TZOO

Travelzoo Inc.

30.30%

3.5

RES

RPC Inc.

25.95%

7.69

OPEN

OpenTable, Inc.

33.20%

3.1

FSLR

First Solar, Inc.

27.30%

7.9

CIEN

CIENA Corp.

32.60%

3.6

WTI

W&T Offshore Inc.

35.30%

12.4

LNN

Lindsay Corporation

27.50%

12.1

URI

United Rentals, Inc.

25.60%

5.9

RBCN

Rubicon Technology, Inc.

86.00%

8.6

NFLX

Netflix, Inc.

30.00%

1.8

RKT

Rock-Tenn Co.

26.30%

7.3

GMCR

Green Mountain Coffee Roasters Inc.

23.80%

4.6

WNR

Western Refining Inc.

24.10%

2.4

WRLD

World Acceptance Corp.

34.30%

20.8

GDP

Goodrich Petroleum Corp.

24.60%

5.6

ADS

Alliance Data Systems Corporation

37.30%

19.2

CADX

Cadence Pharmaceuticals Inc.

82.00%

40.5

Already Popped?

The above numbers were valid as of February 28th. A lot could have changed since then. We need to look for an incredibly high spike in price and volume to discern if the stock has already made a large short covering. Travelzoo, RPC, Open Table and Green Mountain all fit this criteria to some degree.

While there is no doubt that many shorts did not cover in these stocks, you can see a strong price advance on high volume. You may be inclined to jump on the recent trend, but there might also be a pullback after a such a strong move over the past couple of weeks or longer.

Days to Cover?

Also to be considered are the stocks that take many days to cover as defined by the short ratio. Cadence, Alliance Data and World Acceptance take roughly between 20 – 40 days to cover at average daily trading volume. Of course, when huge covering occurs this may take place over a much shorter buying frenzy than that. World Acceptance and Alliance Data are both strongly trending upwards, which make them great picks with huge upsides if a buying panic occurs. Cadence has overhead resistance at $10. As it creeps upward in price I would wait to see if prices pullback before risking a premature entry.

Long-term Growth Rates Generate Excitement

What could be driving prices so high? The long-term growth prospects are very high in many cases.

  • The long-term growth rate of First Solar is 22.75%, Green Mountain is 31.5%, Netflix is 29.39%, Open Table is 38.3%, Rubicon is 38%, and Travelzoo is 25%.

Of course, this rate cannot continue indefinitely as the larger a company is, the more effort it takes to grow percentage wise. But as investors eye these very aggressive growth rates, both extremely bullish and contrarian mentalities are simultaneously trading.

Some of these stocks do not have longer term growth estimates such as Cadence Goodrich, RPC, W&T Offshore, and World Acceptance. The lack of coverage and transparency may create a screen that holds some investors back. If coverage increased on these stocks, and the consensus was very bullish, then I would expect a very powerful short covering to take place.

Another way to uncover stocks that may experience rapid growth even where no analyst coverage exists is using the techniques found in this article on 7 Very Uncommon Growth Stocks.

Relative Strength Creates Confidence

Keep in mind that the relative strength of all the above stocks, except one, are incredibly high. Cadence has a low 52 week relative strength in the mid 30’s, while the rest range from 70 – 99, with the majority being above 90.

Relative strength rates the price performance of a stock over a period of time in comparison to the S&P 500 index. The higher the number is to 100, the better a price performer it relatively is.

Stocks Nearing Resistance

The three stocks I am closely watching right now as they near resistance are Netflix, United Rentals (at the breakout point right now), and Western Refining. If they rise much farther, a flurry of buying may ensue. This could make another nice short-term trading pop when shorts are forced to cover or add margin requirement.

I would recommend waiting until you see them starting to clear this resistance hurdle as more short-sellers may flock to these stocks when this reference point is encountered. This could make the stock pullback briefly before taking another run to break out.

Trading Short Interest Stocks

I like the idea of short interest stocks as I already know there are buyers that need to cover at some point. These stocks have likely already attracted trading attention, which can be good for price action. A lack of coverage is one caveat of small stocks that can weigh down prices.

I like using this technique with stocks that are high-growth and climbing in price since ‘glamour’ investors often pile into stocks with high momentum which exacerbates a short covering. (The CAN SLIM high-growth strategy could be applicable here too) Also, even if I time the entry poorly, these are generally stocks with a good upside over longer periods of time. That is to say, I don’t like trading stocks that are dropping like rocks on bad news since the downside risk is far too great.

Now you have my 17 short-interest stock picks to watch closely. Do you have any others to share?

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Source: 17 Highly Shorted Stocks Ready for a Squeeze