Short-selling is a trading technique that allows investors to profit on a stock's decline in price. The short-seller borrows the stock today, immediately sells it, and agrees to buy it back and return the stock at a future date. That way, the short-seller gets to keep a profit if the stock's price declined.
Short squeeze opportunities arise when a stock becomes highly shorted. As there are fewer short sellers to sell the stock, any significant move up can trigger a short squeeze in which short-sellers must close out their positions (buying back the stock), causing the stock to rally even higher than before. If you are holding the stock, this is a good event.
One way to look for short squeeze opportunities is by finding highly shorted stocks with a vote of confidence from smart money investors such as institutional investors (i.e., hedge fund managers and mutual fund managers).
To demonstrate this technique, we ran a screen on stocks with short floats above 20% (meaning over 20% of available shares -- called the share float -- are currently being shorted ... a very high number).
We screened these stocks for those with significant net purchases from institutional investors over the current quarter, indicating they believe in these names.
Do you think these stocks will soon experience a short squeeze? Use this list as a starting point for your own analysis.
List sorted by short float. (Click here to access free, interactive tools to analyze these ideas.)
List compiled by Eben Esterhuizen, CFA:
1. The McClatchy Company (NYSE: MNI ) : Operates as a newspaper publisher in the United States. Short float at 43.62%, which is equivalent to 39.44 days of average volume. Net institutional purchases in the current quarter at 9.9M shares, which represents about 20.38% of the company's float of 48.58M shares. Over the last six months, insiders were net buyers of 318,799 shares, which represents about 0.66% of the company's 48.58M share float.
2. Diamond Foods (Nasdaq: DMND ) : Engages in processing, marketing, and distributing snack products, as well as culinary, in-shell, and ingredient nuts. Short float at 39.41%, which is equivalent to 19.82 days of average volume. Net institutional purchases in the current quarter at 1.2M shares, which represents about 5.97% of the company's float of 20.10M shares. Over the last six months, insiders were net buyers of 8,225 shares, which represents about 0.04% of the company's 20.10M share float.
3. ITT Educational Services (NYSE: ESI ) : Offers postsecondary-degree programs in the U.S. that provide diplomas as well as associate's, bachelor's, and master's degrees. Short float at 35.04%, which is equivalent to 12.21 days of average volume. Net institutional purchases in the current quarter at 1.9M shares, which represents about 10.68% of the company's float of 17.79M shares. Over the last six months, insiders were net buyers of 374,000 shares, which represents about 2.1% of the company's 17.79M share float.
4. Overseas Shipholding Group (NYSE: OSG ) : Engages in the ocean transportation of crude oil and petroleum products. Short float at 34.95%, which is equivalent to 10.44 days of average volume. Net institutional purchases in the current quarter at 1.4M shares, which represents about 5.98% of the company's float of 23.42M shares. Over the last six months, insiders were net buyers of 73,682 shares, which represents about 0.31% of the company's 23.42M share float.
5. Rex Energy Corporation (Nasdaq: REXX ) : Operates as an independent oil and gas company in the Appalachian, Illinois, and Denver-Julesburg Basins. Short float at 30.33%, which is equivalent to 10.29 days of average volume. Net institutional purchases in the current quarter at 3.8M shares, which represents about 10.86% of the company's float of 34.99M shares. Over the last six months, insiders were net buyers of 77,325 shares, which represents about 0.22% of the company's 34.99M share float.
6. Metabolix, (Nasdaq: MBLX ) : Develops and commercializes alternatives to petrochemical-based plastics, chemicals, and energy. Short float at 23.60%, which is equivalent to 26.64 days of average volume. Net institutional purchases in the current quarter at 6.0M shares, which represents about 20.14% of the company's float of 29.79M shares. Over the last six months, insiders were net buyers of 10,000 shares, which represents about 0.03% of the company's 29.79M share float.
Interactive Chart: Press Play to compare changes in analyst ratings over the last two years for the stocks mentioned above. Analyst ratings sourced from Zacks Investment Research.
Disclosure: Kapitall's Eben Esterhuizen and Alexander Crawford not own any of the shares mentioned above. Short data sourced from Finviz, institutional data sourced from Fidelity.
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