A short squeeze takes place when an excessive amount of short sellers have shorted a stock, the stock comes out with good news, and the price of the stock spikes by an excessive amount, because all the short sellers have to scramble to cover their positions by buying in their shares, often due to the fact that they are getting margin calls.
Potential short squeeze plays have several metrics for comparison purposes. One of the most popular metrics is the Short Interest Ratio, also known as the Days to Cover. What this measures is the number of days it would take the short sellers to cover their positions based on the average daily trading volume. The longer it would take to cover, the higher the ratio. Another analysis is the shares short as a percentage of float. The higher the percentage, the greater the chance that an upside shock would drive up the price.
One industry group that has a lot of volatility and is closely followed by stock traders is the biotech/pharmaceutical/healthcare sector. Many of these stocks have high short interest ratios. One example is Spectrum Pharmaceuticals (NASDAQ:SPPI) which has about 59% of the shares short and a short interest ratio of 27. This means that if all the short sellers wanted to cover, it would take 27 days to do so based on the number of shares traded each day. The stock has a trailing and forward price to earnings ratio of 8, and earnings for the latest reported quarter of 5.2% on a 35.3% rise in revenues. It has 2.46 in cash per share. The company's primary products are ZEVALIN, a cancer therapy, and FUSILEV for patients with osteosarcoma.
Another short interest squeeze candidate Questcor Pharmaceuticals (QCOR) with a short interest ratio of 17. Also, 52.5% of the float is short. The stock trades at 10.5 times trailing earnings and 6.8 times forward earnings. Earnings for the latest reported quarter were up a substantial 143.7% on a 134.6% increase in sales. The company is a provider of prescription drugs for the treatment of multiple sclerosis, nephrotic syndrome, and infantile spasms.
Other heavily shorted healthcare stocks include Bio-Reference Laboratories (NASDAQ:BRLI) with a short interest ratio of 25, Sequenom (NASDAQ:SQNM) with a ratio of 12.4, and Dendreon (NASDAQ:DNDN) at 9.7.
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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.