Insurance Moon: 5 Big Short-Squeeze Stocks Ready to Pop

BALTIMORE (Stockpickr) -- Anxiety is so thick in the air on Wall Street right now, you could cut it with a knife. But that extreme in investor sentiment is creating big opportunities for investors who can see through it right now.

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When most investors hate a stock, you should take notice. After all, buying a name that the bears are piling into has historically been a pretty good strategy to beat the market.

Going back over the last decade, buying heavily shorted large and mid-cap stocks (the top two quartiles of all shortable stocks by market capitalization) would have beaten the S&P 500 by 9.28% each and every year. That's some material outperformance during a decade when decent returns were very hard to come by.

When I say that investors "hate" a stock, I'm talking about its short interest. A stock with a high level of shorting indicates that there are a lot of people willing to bet on a decline in its share price -- and not many willing to buy. Too much hate can spur a short squeeze, a buying frenzy that's triggered by shorts who need to cover their losing bets. And with the rally we've been since last November, you can probably guess that there are lots of losing open short bets.

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One of the best indicators of just how high a short-squeezed stock could go is the short interest ratio, which estimates the number of days it would take for short-sellers to cover their positions. The higher the short ratio, the higher the potential profits when the shorts get squeezed.

It's worth noting, though, that market cap matters a lot -- short sellers tend to be right about smaller names, with micro-caps delivering negative returns when the same method was used.

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Today, we'll replicate the most lucrative side of this strategy with a look at five big-name stocks that short sellers are piled into right now. These stocks could be prime candidates for a short squeeze in 2013.

Salesforce.com

Investors in Salesforce.com (CRM) got their first taste of a squeeze last Friday, as shares of the $30 billion software maker got boosted by 12.5% on the heels of positive earnings news. Friday's bump added some much-needed relative strength to CRM's year-to-date performance, pushing shares' 2013 gains to a market-beating 18%.

But shorts are still squarely betting against Salesforce.com right now. With a short interest ratio of 16, it would take more than three weeks of buying pressure for short sellers to cover their positions.

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Salesforce.com makes business software that customers use to interact with their customer databases. That makes CRM's offerings a must-have application for its 100,000 customers. The firm's web application lets users handle everything from sending newsletters to tracking sales. And since the Salesforce.com platform has a direct, measureable correlation to sales, it's easy for customers to justify paying the bill.

Salesforce was one of the first big software companies to make the move to the "cloud." By offering software hosted online, the firm avoids piracy concerns while at the same time adding new user benefits and converting its business to an attractive subscription-based model. Customers tend to be stickier because they've invested in the firm's platform; because integration takes place deep in the product, switching costs are extremely high for customers considering jumping to a competitor's product.

With a defensible moat and positive earnings momentum this quarter, this stock looks like a prime short squeeze candidate.

IntercontinentalExchange

Eyes are on IntercontinentalExchange (ICE) in 2013, as the firm gets closer to closing its acquisition of NYSE Euronext (NYX), expected to happen this fall. And merger arbitrageurs are taking full advantage of any crumbs left in the deal, contributing to ICE's short interest ratio of 22.6 right now. Ultimately, it doesn't matter why a stock is being heavily shorted, only that it is.

So the fact that it would take shorts in ICE a month to exit their bets at current volume levels makes this a short squeeze candidate even if no one really hates the stock.

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IntercontinentalExchange operates the world's biggest exchanges for niche OTC derivatives, helping to match buyers and sellers of more specialized securities. The firm's clearing business is a very attractive complement to its exchange and OTC trading arm -- it essentially lets ICE fill a role that a third-party would otherwise get a piece of anywhere else. Energy and agriculture are core markets for IntercontinentalExchange. The firm's products are critical for commercial hedgers, and as a result, ICE can command bigger benefits than it would be able to grab if it dealt with more competitive instruments.

The NYX acquisition is going to be transformational for ICE -- it'll give it exposure to more mainstream securities for starters, and it'll let ICE leverage some of the most storied brands in the financial sector. While the deal will lever up ICE's balance sheet as well, it should be immediately accretive to income once one-time merger charges run their course.

Lululemon Athletica

Apparel maker Lululemon Athletica (LULU) is on the exciting end of a big trend in sportswear. The firm was a pioneer in the yoga apparel niche, launching stylish workout gear at the exact same time yoga started to become extremely popular with American consumers. Today, the Vancouver-based firm also boasts more than 220 retail stores spread across the U.S., Canada, Australia and New Zealand.

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Lululemon's position in the market gives it the ability to collect premium prices for its merchandise -- and it shows. The firm generated around $2,000 per square foot of retail space at its company owned stores last year, making it one of the most productive apparel sellers out there. Third-party sales channels offer LULU a zero-risk way to move its workout gear, especially as competitors vie for LULU's customers and brand fragmentation becomes more apparent. As Lululemon moves from being a yoga-wear maker into more general athletic apparel its strong brand should help it maintain a niche advantage.

Despite its upside prospects, LULU is best known on Wall Street for being a volatile name. That's helped push its short interest ratio to 11.9, a level that makes it a short squeeze candidate. Any hint of earnings surprise next week could spark fast buying. Keep an eye on this one.

Banco Santander Chile

It's been a pretty brutal year for shares of Banco Santander Chile (BSAC). Shares of the $10.5 billion Santiago-based bank have slipped more than 21% since the first trading day in January, hit by weakness in emerging markets and inflation concerns specifically in the Chilean peso. That's helped ratchet short interest in BSAC to a lofty 19.7.

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Santander Chile is essentially a bet on the robustness of the Chilean economy. While that argument hasn't held much weight lately, with emerging market economies falling flat versus established markets like the U.S., investors shouldn't forget the capital magnetism that Latin America recently provided. A stable economy in Chile combined with low credit penetration should provide an attractive combination for Santander Chile. The firm's primary customer base has ample runway ahead of it.

Investors are understandably concerned about exposure to the Chilean peso, a currency that has seen more than one iteration in most investors' lifetimes. But better currency controls have helped to curb inflation -- and the peso's biggest risks come from the perpetual strength of the U.S. dollar these days, not a return to hyperinflation. Chile's biggest bank looks cheap this fall after getting sold off hard; a short squeeze could bring shares back to where they should be.

Chipotle Mexican Grill

2013 is panning out to be a stellar year for shares of Chipotle Mexican Grill (CMG). The $12.5 billion fast-casual restaurant chain has rallied more than 36% since the start of the year. But even though short sellers in CMG are feeling the pain right now, they're not paring down their bets against Chipotle. As I write, Chipotle sports a short interest ratio of 12.1.

That means it would take almost three weeks of buying at current volume levels for shorts to exit this stock.

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Chipotle has seen huge success by offering a simple menu of high-quality ingredients. Today, the firm boasts more than 1,500 restaurants in 43 states and four countries. While many competitors have stepped in for a piece of CMG's market, Chipotle's brand positioning as a seller of less-processed, more-natural meats and dairy products isn't easily replicated. At the same time, there's significant room for growth domestically, where Chipotle's stores are concentrated in a few core areas. Expansion beyond North America remains challenging, but CMG's limited store footprint overseas is showing a few glimmers of hope.

From a financial standpoint, a debt-free balance sheet is impressive. To date, CMG has managed to finance new store openings primarily with retained earnings, a fact that adds substantial value to shareholders' positions. As CMG continues to execute in 2013, short sellers should be wary of more of the same.

To see these short squeezes in action, check out this week's Short Squeezes portfolio on Stockpickr.

-- Written by Jonas Elmerraji in Baltimore.

Insurance Moon

Saturday, December 27, 2014

5 Big Short-Squeeze Stocks Ready to Pop

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