We have identified three stocks that are expected to be short-squeezed given their favorable metrics. The following table shows the associated figures for short selling and the short ratio (the days taken by the market to clear a short position).
Polypore International Inc. (PPO)
PPO, a technology filtration company, has two segments - Energy Storage and Separation Media. The latter manufactures membranes that are used to separate the cathode and anode, which are then used in different applications such as lithium-ion batteries (the expensive batteries that are used to drive electric vehicles). These membranes also help in the mechanics of lead-acid batteries, which are used in every conventional automobile and power supply system. The Separation Media Segment manufactures membranes used in healthcare, and is especially useful in a dialysis.
The firm's ROE of 21% and its operating margin of nearly 24%, more than three times that of its competitor Asahi Kasei Corp (AHKSY.PK), shows us that the firm has the ability to grow in profitability. The estimates of yearly growth of 15% in earnings in the next five years prove the same. The stock has declined by almost 15% year to date. Given the fact that regulations are supporting the use of energy efficient vehicles in light of the hike in fuel prices and environmental degradation, the firm might experience increased revenue as the demand for lithium-ion batteries pulls the stock price up and consequently leads to a short squeeze. It will take the market 17 days to cover short positions.
Strum Ruger and Company Inc (RGR)
RGR manufactures firearms and steel castings for licensed U.S. domestic wholesale distributors. RGR experienced a 42.6% growth in earnings this year. It is trading at half the multiple (16x) of its direct competitor, Smith and Wesson Holding Corporation (SWHC). The firm is currently making an ROE of 35%, greater than SWHC's 24%. The operating margin is greater as well. In March this year, the firm was surprised by a 50% unexpected increase in demand, and could not take new orders till the end of May. This spur in demand for arms is similar to the one witnessed in the 2009, the previous election year,after Obama was elected, when firearms fanatics were fearful that he would consolidate gun laws.
Therefore, a lot depends on who is selected as the president of the United States this time around. GOP candidate Mitt Romney has shown an "unsure" behavior toward the issue of gun control. Before 2004, the Republican Presidential nominee signed every bill to outlaw assault weapons. However, in order to win the support of gun advocates (as the critics say), he switched sides in 2006, and joined the National Rifle Association (NRA) - a lobby that vehemently advocates the ownership of guns for self-protection. Obama is expected by some to try to tighten gun laws. Libertarian nominee Gary Johnson is of the view, "If you outlaw guns, only outlaws will have guns"
Despite the surge in the demand for guns, market sentiments show a different story. In a month's time, RGR's shorted shares rose by 12.1%. Estimates for the next year's earnings give a negative growth figure. This is probably because of the expected drop in next year's revenue, which have risen dramatically this year, prior to the elections. It will take 7 days for the market to clear short positions.
Skullcandy Inc (SKUL)
SKUL manufactures and distributes audio accessories and headphones, locally and globally. The firm has an attractive ROE of 31%, way above its competitor Harman International Industrials Inc (HAR) - a retailer of audio and electronic equipment. The firm experienced 50% quarterly revenue growth (year over year) and is expected to experience an average of 20% earnings growth per annum for the next five years. In these circumstances, the stock is expected to be short squeezed on any bullish news as it will take more than 28 days for the short positions to be covered.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.