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There are instances where a major chunk of the market has "ridiculously" taken short positions in certain stocks. Why I call this ridiculous is because these stocks, despite offering bright prospects, have been shorted in large quantities. Tesla Motors (NASDAQ:TSLA) and Sturm, Ruger & Co (NYSE:RGR) are classic examples of this practice. Both stocks are poised for a potential rise based on current indications, meaning that there is a good chance that these stocks could be short-squeezed.

Tesla Motors

The manufacturer of the electric car Model S has faced severe criticism from the market. The company's CEO, Elon Musk, had promised the market that Tesla would deliver 5,000 Model S cars this year and 20,000 units in 2013. However, the company was not able to ramp up its production rate accordingly, and is now expected to produce only 2700-3200 Model S cars this year. The reason why the market has a negative sentiment about the company is that many think Tesla does not have enough financial resources to increase its production accordingly. Therefore, the delivery of cars will not be on time and the company will not be able to produce 20,000 cars next year as well. On-time production is critical for the company, since it will only be able to make its first dollar profit in 2013 if it delivers cars on schedule. The company expects to make 90% of its revenues from sale of the Model S this year.

Tesla was able to raise $200million in its second public offering. This will help the company to expand its production facilities. It is important to understand that Tesla's stock has taken a hit because of supply issues rather than demand issues. The Model S has received extremely favorable reviews from its users. Tesla has produced such an electric car that, unlike other electric cars, does not come with any compromise. The range of 300 miles (for the Model S Signature) in a single battery charge is more than twice that of the Nissan (OTCPK:NSANY) Leaf, and way more than that of General Motors' (NYSE:GM) Volt. The following table provides the ranges of different electric cars:

Electric Models

Price

Range

Nissan Leaf

$27,700

100 miles

Chevrolet Volt (hybrid)

$31,645

35 miles

Mitsubishi Miev

$21,625

62 miles

Fisker Karma (hybrid)

$95,900

50 miles

Tesla Model S

$49,900

160 miles*

*The range of 160 miles is for the Model S Standard, which is less than range for Model S Signature (300 miles).

Also, Tesla is developing the Model X, an electric SUV, which is known for its delightful design, especially the doors that resemble wings of a falcon. Reservations for the Model X have already reached 2,000 in just eight months, following the unveiling of the prototype in California. This number is pretty impressive, given the fact the car has not come on the market as yet -- so many orders were placed only after prospective buyers viewed the prototype. Tesla has promised to start the deliveries for the Model X in 2014. The price, which has not yet been decided, is expected to be between $40-50k. The cumulative reservations for the Model X are expected to reach 3,200 this year. The company has already received a $100 million grant from California to begin production of the Model X.

With such quality and stylish products under its belt, Tesla's stock is expected to fly as the company addresses the production concerns surrounding the Model S. A Morgan Stanley analyst has already commented that production concerns about the Model S are overdone, and it is better for consumers that Tesla is focusing on the quality, rather than the quantity, of the cars it produces. The analyst expects the revenues to be multiplied by 14 through the next four years. Also, the sell-side has a consensus that Tesla's earnings are expected to grow by 112% in the next year, and 37% per annum for the next five years.

It will be interesting to see how the stock moves on the next earnings release, scheduled for November 5. The bullish target price for the stock comes out to be $50 -- 78% above the current stock price. In the case of a short-squeeze, it will take approximately 22 days for the short positions to clear out. Election results this November also remain a potential headwind for the stock, as GOP candidate Mitt Romney is against the funding of Tesla.

Sturm, Ruger & Co

Forty-one percent of RGR's float is currently short. Gun stocks have been soaring high this year, as they always do in an election year. RGR is up 43.5% on YTD basis. This year, gun owners have declared that they will rush to the stores to buy firearms in case Obama is reelected as President of the U.S. Already, RGR and competitor, Smith & Wesson (NASDAQ:SWHC), have enjoyed impressive sales figures. RGR recently manufactured its one millionth firearm for the year. The company is well on its way to breaking its own record of producing the most firearms (1,114,700) in a year. Bears think that if Obama is elected, sales will dry up.

Bulls have a different perspective. First, they think that RGR has a solid backlog, which will help it to maintain earnings for awhile. In the last earnings release, the company had 1.1 million units of backlog. The company's accounting policy tells us that RGR recognizes its revenues when the product is shipped and the customer takes ownership and assumes the risk of loss. Therefore, when the company clears its order backlog, sales will go up. With an average sales price of $269 from the company's 10-Q), RGR will bring in almost $295 million of revenue, which is about 73% of last quarter's revenue of $405 million.

More importantly, many people believe that sales of guns have started to rise not only because of the election year, but also because of rising safety concerns. An 8% unemployment rate is one of the main reasons for these safety concerns. One salesman was also heard saying that most of the buyers are 65-year-old citizens who recognize that they are not physically fit to run or fight, and therefore, feel a need to own a gun for their safety.

FBI background checks are one of the best proxies for retail firearms sales. Handgun background checks were up 23% YOY in September, according to Benchmark. Given that handguns represent a vast majority of sales for RGR, this is also a bullish signal to investors.

RGR will report its earnings on October 29. The short ratio for the stock is 15 days.

Firms

Outstanding shares (Millions)

Floating (millions)

short % of float

Short Ratio

TSLA

112.69

67.5

44.41%

21.49

RGR

19.16

18.53

40.94%

15.33

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Source: These Stocks Are Ready To Be Short-Squeezed