Seeking Alpha
Profile| Send Message| ()  

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 and cut potential losses before other investors. Here are some companies that could be next to see a short squeeze:

Express Scripts, Inc. (ESRX) offers systems and management solutions for health maintenance organizations, pharmacies, insurance companies, government health plans and others. Earnings estimates are at $3 per share in 2011, and $3.62 for 2012.

Why ESRX could see a short squeeze: This stock was trading around $44 in December and it has been in an uptrend ever since. The stock appears to be having a slow but steady squeeze as it heads higher. There are simply too many shorts in this fundamentally sound business. This uptrend is poised to continue and the stock could be headed back to 52 week highs soon. According to the latest data on shortsqueeze.com, there are about 86 million shares short. Based on average volume of just about 7.8 million shares traded per day, it would take about 11 days worth of volume to match the number of shares short.

R.R. Donnelley and Sons (RRD) is a leading printer of many products including magazines, forms, books and more. Earnings estimates for RRD are for a profit of $1.80 per share in 2011 and $1.74 for 2012. This company pays a dividend of $1.04 per share which provides a very generous yield of 9%. The dividend looks very safe as it is easily covered by earnings.

Why RRD could see a short squeeze: In early January, this stock was trading at about $15 per share but it plunged to 52 week lows around $11. This happened on January 16th, after the company provided guidance for 2012, that failed to impress investors. As usual, shorts saw a wounded animal and they piled on, however, the sell-off appears totally overdone based on fundamentals like the PE ratio, and the strong dividend. Shorts have had downside momentum working for them, but the stock appears to have bottomed out now as it has stabilized around $11 per share. Many shorts are likely to start covering as the momentum reverses to the upside. According to the latest data on shortsqueeze.com, there are about 30.5 million shares short. Based on average volume of just about 2.8 million shares traded per day, it would take about 11 days worth of volume to match the number of shares short.

Borg Warner Inc. (BWA) is a leading auto parts maker. BWA is estimated to earn about $4.42 per share this year and $5.28 for 2012.

Why BWA could see a short squeeze: Demand for auto parts has been surprisingly strong, and this is likely to continue into 2012. This stock is showing strength and it looks like it might already be in a slow-moving short squeeze. The stock was trading at about $64 in early January and has been trending higher ever since. It is likely to hit a new high soon, since the stock is only about $3 away from the 52 week highs now. According to the latest data on shortsqueeze.com, there are about 14.7 million shares short. Based on average volume of just about 2.1 million shares traded per day, it would take about seven days worth of volume to match the number of shares short.

Gamestop (GME) is a Texas-based specialty retailer of video games. Gamestop is estimated to earn about $2.87 per share this year and $3.16 for 2012.

Why GME could see a short squeeze: Since many traditional retailers have suffered from online competition, investors are concerned that digital delivery of video games could impact Gamestop in the future. However, the company has addressed this concern by offering digital video game downloads. Gamestop has a strong balance sheet, and is trading just above book value which is $21.41. According to the latest data on shortsqueeze.com, there are about 42.5 million shares short. Based on average volume of just about 3.7 million shares traded per day, it would take about 11 days worth of volume to match the number of shares short.

Safeway, Inc. (SWY) operates grocery stores. SWY is estimated to earn about $1.73 per share this year and $1.83 for 2012. This company pays a dividend of 58 cents per year which yields 2.6%.

Why SWY could see a short squeeze: This stock is in a clear uptrend and it looks like it might already be in a short squeeze that could continue. The stock was trading at about $18.50 in early December and has been rising ever since. Safeway offers a higher than average dividend and the business model is fundamentally sound. According to the latest data on shortsqueeze.com, there are about 41.8 million shares short. Based on average volume of just about 7.9 million shares traded per day, it would take about 5.4 days worth of volume to match the number of shares short.

The data is sourced from Yahoo Finance, Shortsqueeze.com, and Stockcharts.com. 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 only.

Source: 5 Highly-Shorted Stocks That Are Poised To Rally