3 Stocks With Massive Short Interest Where Fundamentals And Technicals Suggest A Breakout Is Near

by: The Independent Investor

The market is going straight down. While the S&P 500 and its tracking exchange traded fund, SPY (NYSEARCA:SPY), is up over 20% from the summer 2011 low, and market leaders such as Apple (NASDAQ:AAPL) are up nearly 40% in the last year, the recent sell-off has been brutal.

Starting in early April with a series of disappointing jobs reports, poor recent economic data and fears over new default in the Euro-Zone are hurting the market once again. With the U.S. economy likely to continue to grow at 2-2.5% a year, government spending in the U.S. increasing very slowly, renewed fears of possible defaults in Europe, and significant slowing in China, the dollar has risen significantly against most major currencies.

The asset class which has fallen the most during the recent decline in risk assets has been commodities. The rise of the dollar and deterioration in the growth outlook has caused major commodities to drop significantly in the last month, and oil has sold-off harder than most major commodities.

West Texas Intermediate prices topped out in early March around $110 and around $40, and have fallen nearly 30%, to around $83 dollars a barrel today.

While falling oil prices have obviously hurt the energy sector significantly, a number of companies will benefit significantly from the massive recent sell-off. The sector that is likely to benefit most from lower fuel costs is the airline sector.

United Airlines (NYSE:UAL) is the largest domestic carrier in the United Stat today. While the company hedge more of its fuel costs today than in the past, United is still heavily leveraged to the price of oil.

As I discussed in my recent article several weeks ago when I recommended buying United Airlines as a company that will benefit strongly from the continued drop in the price of oil, the company recently reported a nearly 5% year-over-year rise in revenues and air traffic.

The airlines have continually had significant issues with labor disputes and fuel costs over the past couple years, but recent bankruptcy filing have enabled United and other airline companies to restructure these company's balance sheets nicely. United today has over $8 billion on its balance sheet an free cash flow of over $1 billion a year.

While United Airlines has sold-off nearly 8% this week, after the recently disappointing traffic report from Delta (NYSE:DAL), the sell-off looks much more like a blow-off top, than a reversal of the nearly 3 month uptrend the stock has been on. United has continually risen over the last several months as energy prices have decline much faster than the company's air traffic has fallen. Today, United Airlines still has a nearly 14% short interest and the stock trades at less than 4x an average estimate of next years likely earnings, and estimates for 2012 earnings have continued to rise over the last couple weeks.

JetBlue (NASDAQ:JBLU) recently reported a strong quarter where the company's net revenue and 12% rise in capacity. The company's year-over-year operating margin also increased significantly from 4.5% to 7%. The company, also, however, reported a nearly 15% rise in year-over-year costs mostly because of rising fuel costs.

JetBlue's stock is also off nearly 5% this week, after the disappointing traffic report from Delta on Monday. Still, Jet Blue sold-off at the $5.25 level, which is nearly exactly where the company's previous nearly six month support was during the first couple months of the rally that began last year.

JetBlue stock is still up nearly 25% in the last month, and the current short interest in the stock is nearly 20%, with the company trading at less than 8x an average estimate of next year likely earnings. Earnings estimates for next year have been rising over the last couple months as well.

Republic Airways Holding Inc. (RJET) is a holding company with a market capitalization of just $260 million. While Republic Airways had significant problem with cash flow after acquiring Frontier Airlines and Midwest Airlines out of bankruptcy several years ago, the company has done a secondary and strengthened its balance sheet of late.

Republic Airways used to simply manage fixed-cost charter flights for the major carriers, but when the economic collapse and subsequent rise in oil prices caused the major carriers to cancel these company's contracts, Republic had to refocus the company's business model. Today the company operates as a regional airline with Frontier Airlines giving the company significant market share in the higher-end west coast market. Midwest Airlines, based out of Milwaukee, has also held up better since the more export based Milwaukee economy has been reasonably strong even over the last couple years.

Republic Airways Holding Inc. shares traded basically flat on Friday and on Monday, despite disappointing recent economic data, and the disappointing recent traffic report. Still, the company's shares are up over 60% since January of 2012, and the Republic Airways Holding Inc. trades at less than 6x an average estimates of next year likely earnings, and earnings estimates have continue to rise over the last couple months. The stock has a short-interest of around 15%.

To conclude, while a rising dollar and deteriorating economy has caused a brutal sell-off in the S&P 500 and most of the broader indexes over the last month, some company's will benefit significantly from lower commodity costs. While the Airline stocks rallied only modestly during the nearly 6 month rally in most equity markets from the summer of last year, the nearly 30% fall in oil prices should bolster these company's' earnings over the next year.

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

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