4 Stocks You Love to Hate

I have nothing against short sellers. There's always a fresh batch of stocks coming undone, and I don't have a problem with the visionaries who can profit from the malaise.

However, I do have a problem when too many shorts begin to circle the wagons around a particular company. They may be right, but aren't these the cynics who lash out at bulls when their irrational exuberance surrounds a certain stock? If so, aren't they practicing irrational pessimism when they're following the herd?

This leads me to short interest ratios. The major exchanges put out monthly lists of shares that have been sold short. A bearish investor sells a stock short, betting that the stock drops in price in order to close out the position by buying at a lower price to cover that short.

Now, I tend to ignore the list of stocks with the largest absolute short positions, because that isn't useful information to me. It's top-heavy with companies that either pack gargantuan market caps or are low-priced stocks with a ton of shares outstanding. The one and only list that wins my attention is the one that features the stocks with the largest short interest ratios.

What's a short interest ratio? Well, it basically divides the number of shares sold short by the average daily trading volume in a particular stock. The end result is the short interest ratio -- also knows as days to cover -- that looks at how many days it would theoretically take for the shorts to cover positions if trading was limited to the daily average.

It's not a perfect gauge. Short sellers don't have to close their positions. However, when they do en masse, it's usually done in a disorderly way. That creates what we call a short squeeze, sending the shares higher as their orders to cover are filled.

Most stocks that have high short interest ratios are simply loathed by a lot of people, though it will occasionally be an arbitrage play, as investors short the common stock if there's a high-yielding convertible option that's attractive.

I'm going to take a look at a few stocks that started out the month with sky-high short interest ratios. Let's see if you can smell a short squeeze or two along the way.

True Religion
There was a time when you weren't a Hollywood starlet unless you were photographed in public wearing True Religion denim. However, pricey jeans can prove to be fickle fashion. I grew up in the '80s, so I'm sure I can dig up an old pair of Jordache or Vidal Sassoon denim that I'm unlikely to fit into again.

True Religion has had other problems, though that's hopefully in the past now that the company has restated its past financials and given its management ranks an extreme makeover. The new growth catalyst at True Religion is growing its retail store base. Yes, the mallrats are a fickle lot, too. However, True Religion is very profitable and growing its top line on healthy operating margins. I'm not sure if I would bet against that, even given the faddish nature of premium-priced trends.

Multimedia Games
Watching over an empire of 13,542 gaming terminals (many of those electronic bingo games nestled in Mexico, as well as stateside Indian-owned casinos) isn't as lucrative as it sounds for Multimedia Games. The company has actually posted an operating loss for three consecutive quarters.

However, this is also a sector that isn't afraid to consolidate. I'm not just talking about the casino operators themselves. Slot, table game, and equipment makers like IGT (NYSE:IGT) and Shuffle Master (NASDAQ:SHFL) haven't shied away from cutting deals in the past.

The key is determining whether a moribund Multimedia Games is worth buying if it can't improve its fiscal performance on its own. Revenues have actually taken a dip through the first three quarters of fiscal 2007. This one appears to be a safer short than True Religion, though you never know when a breakout product or distribution deal might revive this laggard.

Universal Display
Despite what it sees as a positive trend in the display industry's momentum toward the commercialization of Organic Light-Emitting Diode (OLED) products, Universal Display's quarterly report earlier this month showed flat results with last year's showing.

Flat screen? Great! Flat results? Not so great.

Then again, it's not as if investors are buying Universal Display for immediate gratification. It has panned out that way, since the shares have nearly doubled since being recommended in the Rule Breakers newsletter service two years ago, but it's a disruptive technology that will take time to play itself out.

You know what the bears think. They feel investors will throw in the towel before seeing the momentum play itself out or that better mousetraps will sink Universal Display. This may seem like a gamble on either side of the spectrum, though a short interest ratio of 30 days will sting the bears if trigger fingers start to get itchy.

Cosi
I've never stepped inside of a Cosi, though I've always been intrigued by its s'mores campfire dessert. The funny thing is that once Cosi struck a deal with Macy's (NYSE:M) three years ago to open some of its light food eateries inside the department store chain, I never got around to checking out the location that opened two miles from my home.

That deal is done, though. Cosi closed the last of its Macy's units over the summer. Most of the Cosi locations are now company-owned. Despite decent comps, profitability has been elusive through its first five years as a public company. With the dicey reputation of restaurants as viable businesses, it's easy to see why a fringe player like Cosi is an easy target for shorts.

Quite frankly, I can't say I blame the shorts with this one. What will I sample first -- a profitable Cosi quarter or the s'mores? If the bears are right, the correct answer is neither of the above.