Please Note: Blog posts are not selected, edited or screened by Seeking Alpha editors.

Short Squeeze on CoStar


Previously

In a couple of previous article, Short Squeeze and Stock Options and Short Squeeze and Stock Options part II, we discussed the concept of a short squeeze.  Basically, a short squeeze results when there is a large short interest in a stock, i.e. investors short a stock with the hopes the price of the stock goes down.  Sometimes there is so much shorting of a stock that it won't go down anymore, simply because the short investors start to cash in on their profits by repurchasing the stock they shorted.  If enough short investors start to cash in, the stock can actually increase in price, even though the company's fundamentals may not reflect a company whose stock price should increase. 

Two Important Parameters
Two important parameters to consider when determining whether a stock is in a short squeeze are the percent short interest and the number of days of short interest.  Percent short interest is simply calculated as the amount of shares shorted divided by the total outstanding number of shares.  For example, a stock with 100,000 shares of stock shorted and 1,000,000 shares outstanding would have a percent short interest of 10% (100,000/1,000,000).  Number of days of short interest is the number of days it would take all of the short investors at the current stock volume to close all of their short positions.  Number of days of short interest is calculated by dividing the number of shares shorted by the average daily stock volume.  For example, if 100,000 shares of a stock are shorted and the average daily volume is 10,000, then the number of days of short interest is ten (100,000/10,000), which means it would take ten days for all of the short investors to close their positions based on the average daily stock volume.

Parameters Usefulness
Using these two indicators together, percent short interest and days of short interest, gives investors the capability to find stocks which could be tangled up in a short squeeze.  An investor looking for short squeeze stocks would want both of these parameters to be significantly higher than is typically the case with a stock.

Previous Example
As we did with Bank of the Ozarks (NASDAQ:OZRK) in a previous article, we used PowerOptions' (www.poweropt.com) powerful search tools to find companies potentially in a short squeeze.  Once again this month, OZRK popped up as a candidate for short squeeze.  The value calculated for OZRK for percent short interest was 24.7% and for number of days of short interest was 36.  These parameters haven’t changed significantly since the previous article, as previously OZRK's percent short interest was 26.8% and its number of days of short interest was 36.  More importantly, the price of OZRK has increased about 30% since it was flagged in the previous article, and based on the short squeeze parameters may have a lot more room to run.

Example
Another company popping up on the short squeeze radar screen using PowerOptions is CoStar Group with a percent short interest of 18.3% and a number of days of short interest of 31.

 

CSGP Logo

CoStar Group (NASDAQ:CSGP) provides information and marketing services to the commercial real estate industry in the United States and also in the United Kingdom.  CoStar's services are highly sought out by commercial real estate agents, as it saves them time in researching potential properties for their clients and helps them "seal-the-deal".  CoStar Group has weathered the poor economic client rather well, especially considering they are in what has been a poor market segment over the last couple of years.  It's no surprise short investors jumped on this company, as its market segment has been in the gutter for a while and may remain in the gutter for a while.

CoStar’s competition includes First American (NYSE:FAF), LoopNet (NASDAQ:LOOP) and PropertyInfo (private).

CoStar’s stock price is up about 75% from its low in March of 2009 and well off of its two-year in the $60 range.  CoStar’s stock price is currently near the midpoint between the upper and lower Bollinger Bands.

 

CSGP Chart

 
What’s nice about companies in a short squeeze, is the short investors exiting the position creates support for the price of the stock.  While CoStar’s upside doesn’t look promising, it’s potential downside doesn’t look very bad either.  This type of scenario is perfect for the covered call strategy, selling a call option against a long position in a stock.  A covered call position can be entered for February expiration with a potential return of 2.7%.  The time frame for realizing the potential profit is only 38 days.  The call option of interest to sell would be the February 40 with a ticker symbol of CQYBH.

To enter the covered call investing position an investor would purchase the stocks in multiples of 100 shares and sell one call option for each 100 shares of stock purchased.



Disclosure: Have no positions in CSGP, FAF or LOOP

Disclosure: Have no positions in CSGP, FAF or LOOP