On Monday the Dow had a solid rally of about 254 points, but there were a few stocks that outperformed all the indexes many times over. The stocks that showed up on the biggest percentage gainers list on Monday were mostly stocks that were oversold and heavily shorted. These stocks got way too cheap due to the market correction and thanks to shorts who got carried away in pounding them to levels they never should have been at.
One potential problem for shorts is when too many people short the same stock. When a stock is shorted to the point where it becomes an overcrowded trade, it can spark panic buying (a short squeeze). A short squeeze is a big risk for shorts. A small jump in price and/or some good news being released by the company can spark buying by shorts who want to cover their shorts and cut potential losses before other shorts.
The past six weeks have been great for shorts in general as the market has declined, but the momentum almost always turns and for some of these companies it just did. Here some companies that just saw what could be a short covering rally and a couple more that could be next to see a short squeeze:
Central European Distribution Corp. (NASDAQ:CEDC) shares are trading at $8.20. CEDC is a leading beverage distribution company, based in Pennsylvania. The 50 day moving average is $9.05 and the 200 day moving average is $15.53. Earnings estimates for CEDC are 80 cents per share in 2011 and $1.23 for 2012. The 52 week range is $5.21 to $28.08. Book value is stated at $23.83. This stock surged about 50% on Monday partially from shorts covering and the rest on news that a major investor bought a large stake in CEDC. Read more on that here.
Miller Energy Resources (NYSE:MILL) is trading around $3.65. Miller is a oil and natural gas company, and is based in Tennessee. The 50 day moving average is $5.14 and the 200 day moving average is $5.22. These shares have traded in a range between $2.02 to $8.04 in the last 52 weeks. This stock has plunged and recently hit new 52 week lows over concerns about the company that were brought to light recently which caused many shorts to jump in. This stock surged about 61% on Monday.
MGIC Investment Corp. (NYSE:MTG) is trading around $2.93. MGIC is a surety and title insurance company and is based in Wisconsin. The 50 day moving average is $4.27 and the 200 day moving average is $7.66. These shares have traded in a range between $1.59 to $11.79 in the last 52 weeks. Earnings estimates for MTG are for a loss in 2011 and profit of 25 cents in 2012. This stock has plunged and recently hit new 52 week lows over concerns that the housing crisis will continue to lead mortgage insurers like MTG into paying claims for the foreseeable future. This stock has doubled off of recent lows and on Monday it surged about 20%.
Hartford Financial (NYSE:HIG) shares are trading at $19.42. HIG is a leading insurance company. The 50 day moving average is $22.55 and the 200 day moving average is $25.74. HIG pays a dividend of about 40 cents per share, which is equivalent to a yield of about 2.3%. This stock is trading well below book value which is stated at $45.93. HIG shares surged about 13% on Monday on short covering and news that claims from hurricane Irene won't be as bad as some expected.
Here are a some heavily shorted stocks that are deeply oversold and could be poised for a big short covering rally:
E-Commerce China Dangdang (NYSE:DANG) shares are trading around $7.98. Dangdang is based in China and is often likened to be the Amazon.com of China. These shares have fallen from a 52 week high of $36.40. The 50 day moving average is $10.55. Dang has earnings estimates around break even for 2011 and 8 cents for 2012. The Dangdang website is already ranked as the 68th most popular site in China, and could continue to climb over the years. DANG has a current market cap of about $560 million and a enterprise value of about $310 million, due to the cash on the balance sheet of roughly $250 million. This stock is very oversold, back in June it was trading around $20 and now is trading for about a third of that value.
Why DANG shares could see a short squeeze: According to the latest data, there are about 8.1 million shares short. DANG has only about 80 million shares outstanding and the float is even less due to high insider ownership, so this stock is poised for a short squeeze.
Mueller Water Products (NYSE:MWA) is trading at $2.49. Mueller Water Products makes and markets water infrastructure, flow control, and piping component systems for use in water distribution and water treatment facilities. These shares have a 52 week range of $1.94 and $4.80. The 50 day moving average is $3.14 and the 200 day moving average is $3.77, so these shares are trading well below support levels. Estimates for MWA are for a loss of 4 cents in 2011, and profits of 18 cents per share in 2012. Book value is stated at $2.60.
Why MWA shares could see a short squeeze: This stock appear due for a rebound soon and started to show signs of life on Monday when it popped up about 13%. MWA might just be starting to squeeze higher this week. According to the latest data, there are about 11.1 million shares short. This high short interest could fuel a big rebound rally.
The data is sourced from Yahoo Finance and Stockcharts.com.
Disclaimer: The information and data is believed to be accurate, but no guarantees or representations are made. Rougemont is not a registered investment advisor and does not provide specific investment advice. The information contained herein is for informational purposes.