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Brian Stoffel of the Motley Fool points out that a short squeeze -- a heavily shorted stock that has positive news can induce stocks to rocket up -- another path for a rocket portfolio.

His example:

On Aug. 25, 2010, Green Mountain Coffee Roasters (NASDAQ:GMCR) was:

  • Sporting a P/E greater than 50.
  • Seeing its stock reach record highs, having gone up over 300% in the previous two years.
  • Was being heavily shorted.

Clearly, this was a stock to avoid, right? Wrong. The stock is up 190%.

Two key things to look for:

  1. Innovation wins out.
  2. Heavily shorted stocks can jump on any sign of good news.
He then points out these six innovative companies currently attracting a lot of attention from short-sellers, as well as the percent of their available shares (float) being shorted.

Company

What They Do

Short % of Float

Entropic (Nasdaq: ENTR) Connects your home's electrical devices 33%
Soda Stream (Nasdaq: SODA) Soda-making machines for the home 30%
Ebix (Nasdaq: EBIX) On demand e-commerce solutions for the insurance industry 32%
Travelzoo (Nasdaq: TZOO) Travel and local deals 45%
First Solar (Nasdaq: FSLR) Solar power 39%
Coinstar (Nasdaq: CSTR) Redbox DVD rentals and coin-counting machines 37%

Source: Finviz.com.

We are going to compare this with Fredrik Arnold's rocket portfolio.
  • CARBO Ceramics (NYSE:CRR)
  • Netflix, Inc. (NASDAQ:NFLX)
  • Fossil Inc (NASDAQ:FOSL)
  • Tractor Supply Company (NASDAQ:TSCO)
  • Lululemon Athletica inc. (NASDAQ:LULU)

And an ETF dividend portfolio:

Asset Fund in this portfolio
REAL ESTATE ICF (iShares Cohen & Steers Realty Majors)
CASH CASH
FIXED INCOME TIP (iShares Barclays TIPS Bond)
Emerging Market VWO (Vanguard Emerging Markets Stock ETF)
US EQUITY DVY (iShares Dow Jones Select Dividend Index)
US EQUITY VIG (Vanguard Dividend Appreciation ETF)
INTERNATIONAL EQUITY IDV (iShares Dow Jones Intl Select Div Idx)
High Yield Bond HYG (iShares iBoxx $ High Yield Corporate Bd)
INTERNATIONAL BONDS EMB (iShares JPMorgan USD Emerg Markets Bond)

Portfolio Performance Comparison
Portfolio/Fund Name 1Yr AR 1Yr Sharpe 3Yr AR 3Yr Sharpe 5Yr AR 5Yr Sharpe
Fredrik Arnold 5 Rocket Stocks 157% 513% 77% 195%
Retirement Income ETFs Strategic Asset Allocation Moderate 21% 218% 6% 30% 6% 27%
Retirement Income ETFs Tactical Asset Allocation Moderate 16% 172% 12% 97% 11% 81%
Fools Short Squeeze Rocket Stocks

[Click all to enlarge]

Three Month Chart One Year Chart Three Year Chart
The notion of a short squeeze to provide a sharp increase in value is intriguing and it's possible to see in the very recent past that there is a steep rise in the value of the portfolio that would warrant a rocket assignment. However, it is very early in the game and we will track this over the next couple of months to see whether it comes true. The Frederik Arnold 5 still looks awfully good in this company!

Disclosure: MyPlanIQ does not have any business relationship with the company or companies mentioned in this article. It does not set up their retirement plans. The performance data of portfolios mentioned above are obtained through historical simulation and are hypothetical.

Source: Short Squeeze Stocks That Can Create a Rocket Portfolio