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When short sellers target a stock, investors should pay attention for a short covering opportunity. If the pessimism is excessive and there’s a little buying pressure, short covering might cause a rally.

Here we ran a DuPont analysis on highly shorted stocks, with short floats above 20%. We found 11 stocks that passed all requirements for positive sources of change in return on equity year-over-year. We broke the return on equity (ROE) equation into three parts:

ROE
= (Net Profit/Equity)
= (Net profit/Sales)*(Sales/Assets)*(Assets/Equity)
= (Net Profit margin)*(Asset turnover)*(Leverage ratio)

All of the stocks mentioned below have seen rising ROE values for the recent quarter, year-over-year. Then we wanted to analyze the sources of these returns, so we narrowed down the original universe to only focus on companies with the following characteristics:

• Decreasing leverage, i.e. decreasing Asset/Equity ratio
• Improving asset use efficiency (i.e. increasing Sales/Assets ratio) and improving net profit margin (i.e. increasing Net Income/Sales ratio)

Companies passing all requirements are thus experiencing increasing profits due to operations and not to increased use of leverage.

Do you think these companies should be targeted by short sellers? Use this list as a starting-off point for your own analysis.

List sorted by market cap.

1. CBOE Holdings, Inc. (NASDAQ:CBOE): Market cap at $2.19B. Short float at 54.29%. MRQ Net Profit Margin increased from 22.44% to 26.50%, Sales/Assets improved from 0.16 to 0.39, while Assets/Equity decreased from 3 to 1.58.



2. Veeco Instruments Inc. (NASDAQ:VECO): Market cap at $1.98B. Short float at 27.04%. MRQ Net Profit Margin increased from 19.32% to 20.67%, Sales/Assets improved from 0.2 to 0.22, while Assets/Equity decreased from 1.65 to 1.41.



3. Saks Incorporated (NYSE:SKS):
Market cap at $1.79B. Short float at 25.01%. MRQ Net Profit Margin increased from 2.82% to 3.91%, Sales/Assets improved from 0.3 to 0.33, while Assets/Equity decreased from 2.01 to 1.87.



4. The St. Joe Company (NYSE:JOE): Market cap at $1.77B. Short float at 23.77%. MRQ Net Profit Margin increased from -85.79% to 19.20%, Sales/Assets improved from 0.01 to 0.07, while Assets/Equity decreased from 1.22 to 1.22.

5. Diamond Foods, Inc. (NASDAQ:DMND): Market cap at $1.61B. Short float at 29.38%. MRQ Net Profit Margin increased from -3.08% to 3.47%, Sales/Assets improved from 0.11 to 0.17, while Assets/Equity decreased from 3.36 to 2.97.

6. Life Time Fitness Inc. (NYSE:LTM): Market cap at $1.58B. Short float at 20.79%. MRQ Net Profit Margin increased from 8.12% to 8.66%, Sales/Assets improved from 0.13 to 0.14, while Assets/Equity decreased from 2.16 to 1.99.

7. Coinstar Inc. (CSTR): Market cap at $1.55B. Short float at 40.97%. MRQ Net Profit Margin increased from 1.99% to 2.0%, Sales/Assets improved from 0.26 to 0.36, while Assets/Equity decreased from 2.96 to 2.8.

8. athenahealth, Inc. (NASDAQ:ATHN): Market cap at $1.44B. Short float at 25.14%. MRQ Net Profit Margin increased from 0.51% to 4.65%, Sales/Assets improved from 0.25 to 0.26, while Assets/Equity decreased from 1.61 to 1.48.

9. LDK Solar Co., Ltd. (NYSE:LDK): Market cap at $1.05B. Short float at 21.14%. MRQ Net Profit Margin increased from 2.07% to 17.67%, Sales/Assets improved from 0.08 to 0.12, while Assets/Equity decreased from 5.23 to 4.81.

10. STEC, Inc. (NASDAQ:STEC):
Market cap at $894.88M. Short float at 32.17%. MRQ Net Profit Margin increased from -13.79% to 14.90%, Sales/Assets improved from 0.13 to 0.25, while Assets/Equity decreased from 1.1 to 1.09.

11. Zumiez, Inc. (NASDAQ:ZUMZ): Market cap at $747.72M. Short float at 26.07%. MRQ Net Profit Margin increased from -2.13% to 1.79%, Sales/Assets improved from 0.33 to 0.34, while Assets/Equity decreased from 1.41 to 1.36.

*Accounting data sourced from Google Finance, all other data sourced from Finviz.

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

Source: 11 Highly Shorted Stocks With Solid Profitability