Rebound Ideas: 10 Highly Shorted Stocks Undervalued by Graham's Standards

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by: Kapitall

If you like to profit from short squeezes, then this may be an interesting starting point for your own analysis.

To construct this list we looked for stocks with the following characteristics:
- Market cap above \$300M
- Short Float above 15%
- Trading at a significant discount to the Graham Number

The Graham Number was considered to be the maximum price an investor should pay for a stock, according to the formula developed by Benjamin Graham. â€¨

It is calculated as follows:â€¨

Graham Number = Square Root of (22.5) x (Earnings per Share) x (Book Value per Share).â€¨â€¨

This equation is predicated on Grahamâ€™s belief that the price-to-earnings (P/EPS) ratio should be no more than 15, and the price-to-book value (P/BVPS) ratio should be no more than 1.5.â€¨â€¨

Therefore we only included companies that meet both of these criteria. As a result, the product of the two should not be more than 22.5. In other words, (P/EPS of 15) x (P/BVPS of 1.5) = 22.5.

We last wrote about this screen on April 14. On that day, the screen produced 8 companies. Since then, 5 out of 8 companies mentioned in that article have outperformed the S&P 500 index (a success rate of 62.5%). The screen averaged a price-weighted return of 3% vs. an index return of 2.1%. Click here to access a full breakdown of the screen's past performance.

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Given this past performance, we wanted to update the screen to reflect today's short seller trends. Here is the final list of the updated screen:

1. Harbin Electric, Inc. (NASDAQ:HRBN): Industrial Electrical Equipment Industry. Market cap of \$538.75M. Short float at 32.29%. BVPS at \$13.44, diluted EPS at \$2.46. Graham number = sqrt(22.5 x \$13.44 x \$2.46) = \$27.27. Given the current price at \$17.46, this implies an upside of 35.98%. This is a risky stock that is significantly more volatile than the overall market (beta = 2.17). The stock is a short squeeze candidate, with a short float at 32.29% (equivalent to 12.9 days of average volume).

2. Skechers USA Inc. (NYSE:SKX): Apparel Footwear & Accessories Industry. Market cap of \$908.67M. Short float at 16.49%. BVPS at \$19.26, diluted EPS at \$1.87. Graham number = sqrt(22.5 x \$19.26 x \$1.87) = \$28.47. Given the current price at \$18.3, this implies an upside of 35.71%. The stock is a short squeeze candidate, with a short float at 16.49% (equivalent to 5.33 days of average volume). The stock has lost 53.8% over the last year.

3. Yingli Green Energy Holding Co. Ltd. (NYSE:YGE): Semiconductor Circuits Industry. Market cap of \$1.61B. Short float at 65.66%. BVPS at \$8.27, diluted EPS at \$1.4. Graham number = sqrt(22.5 x \$8.27 x \$1.4) = \$16.14. Given the current price at \$11.13, this implies an upside of 31.04%. This is a risky stock that is significantly more volatile than the overall market (beta = 3.01). The stock has gained 1.87% over the last year.

4. Liz Claiborne Inc. (LIZ):
Apparel Clothing Industry. Market cap of \$594.03M. Short float at 24.77%. BVPS at -\$1.32, diluted EPS at -\$2.93. Graham number = sqrt(22.5 x -\$1.32 x -\$2.93) = \$9.33. Given the current price at \$6.48, this implies an upside of 30.54%. This is a risky stock that is significantly more volatile than the overall market (beta = 2.18). The stock is a short squeeze candidate, with a short float at 24.77% (equivalent to 8.48 days of average volume).

5. Amedisys Inc. (NASDAQ:AMED): Home Health Care Industry. Market cap of \$963.96M. Short float at 20.83%. BVPS at \$30.64, diluted EPS at \$3.19. Graham number = sqrt(22.5 x \$30.64 x \$3.19) = \$46.9. Given the current price at \$32.98, this implies an upside of 29.67%. Might be undervalued at current levels, with a PEG ratio at 0.77, and P/FCF ratio at 8.22. The stock is a short squeeze candidate, with a short float at 20.83% (equivalent to 15.09 days of average volume). The stock has lost 41.81% over the last year.

6. GameStop Corp. (NYSE:GME):
Electronics Stores Industry. Market cap of \$3.63B. Short float at 27.29%. BVPS at \$19.84, diluted EPS at \$2.65. Graham number = sqrt(22.5 x \$19.84 x \$2.65) = \$34.39. Given the current price at \$25.93, this implies an upside of 24.61%. Might be undervalued at current levels, with a PEG ratio at 0.65, and P/FCF ratio at 9.22. The stock is a short squeeze candidate, with a short float at 27.29% (equivalent to 8.41 days of average volume). The stock has gained 11.5% over the last year.

7. Zhongpin, Inc. (NASDAQ:HOGS): Food Industry. Market cap of \$568.64M. Short float at 17.15%. BVPS at \$11.36, diluted EPS at \$1.74. Graham number = sqrt(22.5 x \$11.36 x \$1.74) = \$21.09. Given the current price at \$16.2, this implies an upside of 23.18%. The stock is a short squeeze candidate, with a short float at 17.15% (equivalent to 10.11 days of average volume). The stock has gained 25.% over the last year.

8. Cninsure Inc. (CISG): Insurance Brokers Industry. Market cap of \$671.64M. Short float at 15.48%. BVPS at \$9.4, diluted EPS at \$1.31. Graham number = sqrt(22.5 x \$9.4 x \$1.31) = \$16.65. Given the current price at \$13.08, this implies an upside of 21.42%. The stock is a short squeeze candidate, with a short float at 15.48% (equivalent to 11.45 days of average volume).

9. SunPower Corporation (SPWRA):
Semiconductor Industry. Market cap of \$2.11B. Short float at 18.49%. BVPS at \$18.02, diluted EPS at \$1.75. Graham number = sqrt(22.5 x \$18.02 x \$1.75) = \$26.64. Given the current price at \$21.38, this implies an upside of 19.74%. Exhibiting strong upside momentum--currently trading 16.38% above its SMA20, 24.87% above its SMA50, and 48.48% above its SMA200. The stock has had a good month, gaining 30.32%.

10. American Greetings Corp. (NYSE:AM-OLD): Business Services Industry. Market cap of \$964.42M. Short float at 19.95%. BVPS at \$18.53, diluted EPS at \$2.11. Graham number = sqrt(22.5 x \$18.53 x \$2.11) = \$29.66. Given the current price at \$24.38, this implies an upside of 17.8%. The stock is a short squeeze candidate, with a short float at 19.95% (equivalent to 32.52 days of average volume). The stock has lost 2.61% over the last year.

*Relevant data sourced from Yahoo! Finance and Finviz.

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