Do You Really Hate These Stocks?

I haven't shorted a stock since betting against Einstein Bagels in the 1990s. That worked out just fine for me, but on the whole, I've always been an optimist at heart. Nonetheless, I relish the ability to take a contrarian view when I see the monthly lists of the most shorted stocks on the major exchanges.

Everyone tends to hate the same stocks for a reason. They are broken models. They are overpriced. They are purveyors of vaporware on a road to Nil City. I get it. However, I love to look for buying opportunities among the stocks with the highest short interest ratios, because they represent built-in buying power when the shorts eventually cover.

What is the short interest ratio? In a nutshell, it divides the number of a company's shares being shorted by the average number of shares that trade in a single day. If a stock typically has trading volume of about 100,000, and there a million shares sold short, it would take 10 days to cover those shorts -- hence, the short interest ratio is 10. In theory, the higher the short interest ratio, the more dramatic the short squeeze would be if nervous cynics rushed to unload their positions.

I'm going to take a closer look at four of the stocks with the highest short interest ratios that nonetheless may beat back the bears.

ZipRealty (NASDAQ:ZIPR)
Boy, do we love to pile it on when the chips are down. Residential real estate is so out of favor that even Wisteria Lane can't find enough homeowners. The current glut of homes on the market is kryptonite for real-estate agents. Available homes are sitting on the market longer, which means more time and money spent in promoting and showing a home until a deal is made. So it's not all that shocking to see both the top- and bottom-line dip at ZipRealty lately. The company has also gone through a few corporate executives in recent months.

However, ZipRealty is cash-rich. The company is carrying $3.76 a share in cash -- a whopping one-half of its market cap. Even through the current housing lull, ZipRealty is doing a good job of keeping its greenery intact, which will serve as a welcome cash cushion if the stock does tick lower. The company is also expanding into new markets while rivals hold their ground or retreat.

Sharper Image (NASDAQ:SHRP)
If Sharper Image could write a song, it would probably be While My Air Purifier Gently Weeps. The peddler of eclectic electronic gadgetry has seen its massage chairs, home theater equipment, and exercise gear collect cobwebs over the past few quarters. Comps for the month of November fell a staggering 27%, which was actually a better showing than the steeper freefalls in its online and mail-order subsidiaries.

Like ZipRealty, Sharper Image has also had a revolving door at the executive level. The sweeping process even took out the company's founder and CEO back in September. Thankfully, the company has a proven turnaround expert at the helm now. Sharper Image's challenge is huge, since shoppers can snap up many of the gizmos it stocks at major consumer electronics superstores like Best Buy (NYSE:BBY), not to mention more conventional department store chains. The heavy shorting indicates that Wall Street doesn't think Sharper Image will bounce back, but I believe that the concept can be saved, and that the precipitous comp slides will help inflate the impact of even a modest recovery.

eCollege.com (NASDAQ:ECLG)
Internet-based learning seemed to be all the rage a few years ago, but nowadays, investors have been flunking online educators such as Apollo Group (NASDAQ:APOL). The University of Phoenix parent has seen its stock shaved in half over the past two years. However, one of the reasons given for its slump is the proliferation of mainstream institutions giving it a go in cyberspace. That will actually benefit eCollege, since it arms institutions with software tools that enable distance learning.

In two weeks, eCollege will update shareholders on its outlook for 2007. I smell a short squeeze if the company has some upbeat news to deliver. Whether it's new growth initiatives, the unloading of its sluggish Datamark enrollment business, or just a generally optimistic outlook, there are many ways for eCollege to make the grade. I'm not sure I want to be betting against the company at this point.

Universal Display (NASDAQ:PANL)
The promise of Universal Display's ability to translate phosphorous organic light-emitting diodes (PHOLED) into practical applications like commercial lighting and rollable displays is starting to happen. Sure, sales slipped this past quarter, but a disruptive technology revolution is rarely a perpetual forward march.

Recent declines at the other stocks on this list may have prompted the pessimistic deluge, but Universal Display has actually held up pretty well. The stock has risen 66% higher since it was recommended to Motley Fool Rule Breakers newsletter subscribers in the summer of 2006. Analysts are pretty upbeat here, expecting losses to narrow in 2007, with revenues staging a 53% advance. Investors likely won't mark down that kind of performance if Universal Display can deliver the goods.

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Longtime Fool contributor Rick Munarriz doesn't mind sifting through unloved options for a good dining opportunity. He does not own shares in any of the companies in this story. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.