4 Highly Shorted Stocks With Growth Potential

by: Skyler Greene

One school of investing thought says "the trend is your friend," while another school posits that beaten down companies often offer investors better value than the companies that everyone likes.

With that in mind, here are five companies you might consider looking into if you're feeling contrarian. They're all characterized by high short interest, yet they have fairly strong growth metrics -- thus, they could be candidates for a short squeeze. If you think these stocks deserve more investor confidence, they might be good targets for further research.

8X8 Inc (EGHT)

8x8 is one of the largest VoIP providers in the US, primarily targeting small and medium businesses. The stock has a fairly high short interest (11.39%), yet has several attractive characteristics:

  • TTM P/E looks dirt cheap at 4.3
  • The 3-year cash flow growth rate is +287%
  • Projected EPS growth is 66.36% year-on-year, and next year's EPS growth is currently projected at 47%
  • Operating margin, at 9.23%, is 43rd percentile in the industry -- not great, but not terrible.

Green Mountain Coffee Roasters (GMCR)

Green Mountain, the coffee company behind Keurig, became the hot stock to short after David Einhorn blasted it. Current short interest is just a tick under 15%, yet the stock has several impressive qualities:

  • P/E looks pretty reasonable, at 10.8
  • Green Mountain has been a cash machine, with a 3-yr cash flow growth rate of 97.56%
  • Operating margin, at 15%, is good for 80th percentile in the food industry -- and the profit margin of 10.5% is above the industry average of 7.7% as well
  • Projected EPS growth for this year is 44% and next year's projected growth is 31%

Zagg Inc (ZAGG)

Zagg makes covers for the iPad and other consumer electronics devices. Short interest is very high, at 27.5%. Reasons the company might not be as bad as everyone thinks:

  • 30% projected year-on-year EPS growh and 25% projected EPS growth next year
  • 3-year cash flow growth rate of +120%
  • P/E, at 17.6, doesn't look terribly overpriced, especially since the PEG is only 0.66
  • The current ratio is a solid 3.25, and due to the nature of the company's business, operating margin is fairly high at 20%

JetBlue Airways (JBLU)

JetBlue has an oustanding short interest of 13.3%, but may not deserve such lack of confidence. Why?

  • 3-year cash flow growth rate is 35%
  • Projected EPS growth for the year is 97%, and projected growth for next year is 24%
  • Operating margin, at 7.63%, is in line with the airline industry average of 7.9%. In fact, JetBlue's profit margin (2.5%) is above the industry average of 1.8%.
  • P/E, at 15.08, looks fairly in line with the airline industry's current average of 15.75.
  • With fuel costs dropping significantly, airlines should see a benefit to the bottom line later in 2012 (the exact "when" depending on hedging programs)

It's up to you to decide whether these stocks will sink or swim. But their generally strong metrics suggest that the extreme short interest may not be justified.

Disclaimer: I am an individual investor, not a licensed investment advisor or broker dealer. Investors are cautioned to perform their own due diligence. All information contained within this report is presented as-is and has been derived from public sources & management. Always contact a financial professional before making any major financial decisions. All investments have an inherent degree of risk. The future is uncertain, and actual results may be materially different from those expected. Past performance is no guarantee of future results. All views expressed herein are my own, and cannot be interpreted as the views of my employer(s) or any organizations I am affiliated with. Presentation of information does not necessarily constitute a recommendation to buy or sell. Never make any investment without conducting your own research and reading multiple points of view.

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