Today's surge in Sears Holdings (SHLD) is yet another wake-up call to traders trafficking in crowded shorts. I think the company has horrible fundamentals, but I had highlighted it as an over-shorted value play in late January, when it was already off to the races. SHLD isn't the only stock burning the shorts. As of 2/22, over 5% of the Russell 1000 was shorted in excess of 15% of the float, and these stocks are up an average of 18% year to date.
As I have been sharing, I am quite bullish. In fact, I expect the market to surge to 1600 this year. In an environment where retail investors may finally be returning to the market as the economy rapidly skates from the thin ice of a potential double-dip recession, crowded shorts could prove especially painful. With this in mind, I wanted to design a "short-buster" screen using Baseline. Here is what I did:
- Member of the Russell 1000
- Short-interest > 15% of float
- Within 5% of 52-week high
- 2013 earnings growth vs. 2012 > 0
Now, for those who are familiar with my contributions to Seeking Alpha over the past five years, I tend to discuss potential long-term entries. In this case, though, I am identifying potential trading opportunities. None of these stocks is on my closely followed watchlist, so be especially careful to do your own research.
A few observations... First, a few of these companies have little or no net debt - always a plus when speculating on heavily shorted names. Second, a few of these names are near their highs but haven't really soared over the past year. These, then, are longer-term consolidations and could prove to be less risky entries. Finally, while I didn't require it, all of these companies are enjoying rising estimates for next year.
At the top of the list is Continental Resources (CLR), which is "rockin in the Bakken." Talk about a stand-off! The CEO, Harold Hamm, owns a ton of stock (123mm shares) - over 50%. His last action was a buy in September. To me, the stock looks extended and somewhat overbought at this point
Tempur-Pedic (TPX) fell out of bed during the Great Recession, facing high debt and low demand for its premium products, but this one is at an all-time high. The sub-20PE is below the projected EPS growth over the next few years, though it's a premium to the median of about 16X since it came public in late 2003.
I looked at Alliance Data (ADS) a few years ago and felt like the CEO was a bit too aggressive, but the stock has done well, soaring to an all-time high. The company provides online marketing services and also provides private label credit cards (taking credit risk). Earnings estimates here just keep going up.
Garmin (GRMN) is doing reasonably well despite concerns that its devices will be killed by the proliferation of smartphones. 2011 saw a sales decline, while 2012 is projected to decline as well. Analysts are projecting an advance in 2013. While not an all-time high, it did break out recently from multi-year resistance. The balance sheet is stuffed with cash - approximately $10 per share (adjusting for several non-debt liabilities). GRMN is extended and overbought, so I would be careful with it.
Tesla Motors (TSLA) is pressing against its late 2010 post-IPO highs. I will confess to total ignorance about this company, which makes electric vehicles, except for an awareness of the guy behind it (Elon Musk), who owns 29% of the company.
Wesco International (WCC) is a distributor that was spun out of Westinghouse in 1994 and serves the Industrial, Construction, Utility and Commercial/Institutional/Governmental markets. It's one of the cheaper names in terms of PE on the list.
J.C. Penney (JCP), of course, has an exciting new CEO who is early in his efforts to revamp the retailer. I have heard a lot of people talking this one down for valuation reasons, but I wouldn't bet against Ron Johnson's ability to drive sales growth and improve margins. According to Baseline, rival Macy's (M) has a 7% pre-tax margin, while JCP is close to 1%. The stock trades at 8X EV/EBITDA - not exactly a rich level for a turnaround.
The last two are REITs. I don't know Douglas Emmett (DEI) at all (focused on California and Hawaii), but Digital Realty (DLR) is a great company, in my view, riding the cloud. Neither of these stocks is particularly overbought.
So, that's a quick rundown on the 9 companies that look to me like they could keep burning the shorts.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.