The Next Short Squeeze

by: Esekla

The next batch of exchange provided short interest data is set to be announced after the market closes on July 25th. Short squeezes are extraordinary market occurrences that can deliver phenomenal returns, and even change the fortunes of the underlying companies. However, by definition, squeezes disconnect the equity from the fundamentals for the company; therefore buying a stock based on the prospect of a short squeeze alone is not recommended, unless one could somehow be certain of the catalyst.

Short sellers are, of necessity, a very market savvy group and thus the catalyst for a squeeze is typically fundamentally solid, yet a surprise, at least in terms of timing. This article will compare and contrast 4 short squeeze candidates that I've been following for quite a while. The short data is sourced from the 5/31 exchange reports on Yahoo, whose data reflects share buybacks, and other stats are from my brokerages. Any readers not familiar with the terms here should refer to my previous article on the short squeeze in Tesla Motors (NASDAQ:TSLA) for a primer.

Let's begin there...

TSLA Chart
Shorted Float Days to Cover Rebate Rate Implied Volatility Historical Volatility
23.03%* 1.18 1.285% 65.6% 58.2%

* - shorted float adjusted to include recent dilution, which was not reflected on Yahoo

Even though TSLA is still winding down a squeeze of historic proportions, a glance at the figures indicates that a further "aftershock" is still possible, especially with Tesla's excellent management and ardent fan-base. However, even though the shorted float is above 20%, that's only a little more than half of what it was just a few months ago, and the rebate rate has come all the way down from over 80%. All the other figures indicate that the stock could move very quickly in either direction. Short squeezes have a tendency to drop-off as steeply as they ascended, though I'm not sure that will happen in this case.

Certainly, it should not happen because of new shorts on the stock. Shorting is all about timing, and the $1.08 billion in capital raised by Tesla in the recent squeeze has insured that the company will be around for years to come. That said, see some of my other articles for issues that will confront Tesla over the long term as they continue to strive to establish themselves in the mainstream and grow into their current stock price. Consequently my opinion is that this stock is too risky for either long or short positions, but the next batch of short data could change that. It certainly bears watching.

CSTR Chart
Shorted Float Days to Cover Rebate Rate Implied Volatility Historical Volatility
42.70% 15.89 7.035% 34.8% 36.2%

As one of the most highly shorted stocks on the market, Coinstar (NASDAQ:CSTR) is a must-watch for people who understand squeezes. Shorts contend that the Redbox business of renting DVDs, which accounted for 88% of revenue last quarter, is outdated and being replaced by streaming. They say the selection at the Redbox Instant streaming joint venture with Verizon (NYSE:VZ) simply doesn't measure up to competition from Netflix (NASDAQ:NFLX) or Amazon (NASDAQ:AMZN), and this contention is pretty undeniable at present. Longs argue the timing and slope of DVD phase-out, and point to earnings that make the stock fairly valued at present prices. The company beat on earnings, but disappointed on revenue and guidance last quarter. Some will also point out that Coinstar is not just a video peddler, but an innovative, opportunistic purveyor of automated retail solutions and the proposed name change to Outerwall (OUTR) underscores this focus.

Examples would be their Rubi kiosks selling Starbucks (NASDAQ:SBUX) coffee, and the foray into ticket sales. My own opinion is that breakout success in the former venture does not seem imminent, and the latter is a very tough nut to crack. So while CSTR doesn't have the huge capital risk of TSLA, it's hard to see an event in the near term that would set off a squeeze, and better entry points seem likely. The rebate rate has been dropping steadily for the past few weeks, but is still high enough to discourage extended shorting. This probably indicates that the stock has been cycling through a stream of temporary shorts which would support the price while it lasts.

Although I've followed, and occasionally profited from, this company for quite a few years, I haven't published individual research on them yet. For those wishing to read further, here is recent summary of the business, and what I think is a nicely balanced SA article. To me, CSTR looks like a powder keg without a fuse, but the sheer amount of explosive and relatively strong fundamentals (P/E 15.6) makes it worthy of consideration.

PANL Chart
Shorted Float Days to Cover Rebate Rate Implied Volatility Historical Volatility
35.50% 12.13 0.580% 50.7% 61.8%

Universal Display (NASDAQ:OLED) is another company that is changing its ticker symbol (on 6/24, from PANL). My research indicates that this stock is trading well below fair value, which should limit risk, though the volatility figures and revenue predominantly from Samsung (OTC:SSNLF) argue otherwise. The reason for the price slump is probably a scale back of sales estimates for the Galaxy S IV, but since Samsung will sell all the OLED displays it can produce, regardless of the devices they go into, this reaction seems unwarranted.

Consider that situation together with the fact that next earnings report, due in early August, will include increased licensing revenue and be the first to fully account for supplying the new screen, and we just may have the catalyst we need. There are multiple other squeeze-triggering opportunities on the horizon as well, including:

Put it all together, and you have probably the most compelling reward to risk ratio of any stock mentioned here, though developments still will need to be monitored carefully.

INVN Chart
Shorted Float Days to Cover Rebate Rate Implied Volatility Historical Volatility
22.60% 6.79 0.410% 59.3% 58.0%

Like Universal Display, InvenSense (NYSE:INVN) represents a good long-term opportunity in its own right. The price entry point is not quite as good, though it has pulled back under my more recent price target of $15, when reports of a long-awaited Apple design win were challenged. Though conversations between the two are ongoing, InvenSense management's comments indicate an unwillingness to get roped into wrecking margin for volume, like many other Apple suppliers. Consequently, I don't believe they will gain Apple as a customer until the release of an iWatch or similar device that absolutely requires InvenSense's best-in-class form factors and power usage. It's also possible that continued good news on their legal battles with ST Micro (NYSE:STM) could move the stock.

The recent inclusion in Google Glass and other wearable devices supports my long-term thesis for INVN and the idea that they will land Apple eventually; I just don't think the timing is right, and I would prefer to see the shorted float a little higher yet for a short squeeze move back over the $20 highs for this stock. Still, InvenSense's business is more diversified and mature than UDC's, with far better fundamentals. INVN will have a trailing P/E <23 if they merely meet estimates in their earnings report at the end of July. This makes it an arguably much safer investment for those willing to wait.

Short squeezes are unusual, often highly volatile and therefore risky, market situations that are best suited to sophisticated investors. Each of these stocks presents a different risk profile and different degrees of short squeeze potential. The imminent release of the next batch of short data will prove very interesting for each of these stocks. Any large rises in the short ratios could result in very actionable opportunities which I plan to discuss in the comments section of this article.

Disclosure: I am long OLED, TSLA. 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.