Traders with short positions -- i.e. market bets that stocks will go down in price -- may find themselves in an unpleasant situation known as a short squeeze. That's when the traders are forced to buy the shares of the company they shorted in order to cover their positions and avoid losses. As the shorts pile in to buy the shares, the price can rise further, aggravating their losses. But their losses may be other investors' gains, if savvy market players can identify those stocks with potential to get caught in a squeeze.
That was the thinking behind this week's screen. We set out to find ideal short-squeeze candidates by first identifying those stocks which appear to have heavy betting against them. Each of the stocks on our list has a short interest (total number of shares that have been sold short and not yet closed out) as a percentage of the total number of its shares greater than 15%. The market median short interest of the S&P 500 is 2%.
Then we looked for stocks of companies scheduled to release quarterly earnings within 30 days of the date we ran the screen (Apr. 17). If their stocks move positively because of earnings reports, short sellers may be forced to buy back these shares in the coming weeks, which could cause a surge in the stock price.
We wanted a backstop to make sure these names were attractive investments. So we next looked for those stocks carrying Standard & Poor's top stock rankings of 4 STARS (buy) or 5 STARS (strong buy) and an outperform or better ranking from the top-rated analysts compiled by the StarMines service.
We limited this screen to stocks priced over $5.00 per share and with a market capitalization of at least $1 billion.
Here are the five names that emerged. Airlines are prominently represented in the output of the screen.