Think Twice Before Shorting These 4 Stocks

I have nothing against shorts. The market facilitates the ability to profit from both the rise and fall of publicly traded companies, and clearly the past few months have benefited those betting against the market.

There clearly are plenty of bears out there. As of the end of January, the Nasdaq alone accounted for over 8 billion shares sold short.

Again, I don't have a problem with that. There are crummy companies out there that deserve to be shorted. There are overvalued quality companies just begging to be taken down a few notches.

However, I'm always cautious when it comes to companies with high short interest ratios. What's that? It's a metric used to gauge the level of shorting activity relative to a particular company's trading volume. Dividing the number of shares sold short by the average daily volume will reveal a stock's short interest ratio. In a nutshell, it's the number of days that it would take for all of the shorts to initiate buy orders to cover their shorts, under the hypothetical scenario of average daily trading volume.

It doesn't work out that way. High short interest ratios often trigger short squeezes, sending shares higher as an event prompts an unusual amount of shorts to head for the exit.

Since I'm staring at the list of stocks with the highest short interest ratios, these are a few that stand out to me as vulnerable to short squeezes.

Spanish Broadcasting
Investing in Spanish-language radio hasn't been very glamorous. Spanish Broadcasting runs several popular stations in hot markets -- including the country's most listened-to Latino market station in New York City -- but its fiscal performance has been uninspiring. Analysts expect the company to post a small loss for all of 2007 on flat revenue growth when it reports next month. A small profit on a mere 4% top-line uptick is in the cards for 2008.

Spanish Broadcasting has a decent model. It acquires failed English-language FM operators in underserved Latino markets and transforms them into its high-energy format. The emphasis on FM instead of AM -- where the ad dollars are flowing to win the Latino vote this election year -- finds it lagging larger rivals like Univision and Entravision (NYSE: EVC), but radio is just part of the story these days.

Spanish Broadcasting has entered the television market and recently struck a deal with DirecTV (NYSE: DTV) to beam its MEGA television station programming nationally. With several potential catalysts in the wings, why bet against an already battered stock?  

ParkerVision
In theory, it's the perfect company to short. Despite claims of unearthing a breakthrough in radio amplifier technology, ParkerVision's reality has been paved in red bricks. Racking up $160 million in losses over its 17-year history, investors have a right to wonder when the company's wireless hype will bear fruit.

A recent Barron's story presented both sides of the debate. Cynics will be quick to side with the bears. I even pegged the stock to underperform relative to the market in Motley Fool CAPS. However, the short interest ratio should give any trader pause in betting against the company with real money. Even if the company's breakthroughs break until it's through, you still have nearly seven million shorts riding against a pretty illiquid stock. It's a dangerous game of Hot Potato.  

Great Wolf Resorts
This morning's earnings report out of Great Wolf is a mixed bag. The company behind lavish family resorts with huge indoor waterparks bested expectations but provided lukewarm guidance for the year ahead.

However, what I really like here in this former Rule Breakers recommendation is that the company has now posted year-over-year increases in its average revenue per available room -- the metric in hotel hospitality -- for seven consecutive quarters. In short, even if the income statement isn't pretty and the balance sheet could use a makeover, the Great Wolf concept works.

True Religion
Who wants to bet on pricey denim given an iffy economy? Well, True Religion believers seem to be pretty faithful. The company posted a 24% spurt in net sales for all of 2007, with a similar 21% to 24% gain projected by the company this year.

Yes, fashion can be fickle, but cynics have been preaching about the end of True Religion for a few years now. Foolish heretics! True Religion is still kicking and sticking.

Four for the road
If you're shorting stocks, keep going. You know the risks. You know about the theoretically unlimited downside.

However, bears need to approach the stocks that are heavily shorted with the same amount of cynicism they would have for buoyant stocks puffed up by a bullish mob. Yes, it's only natural for bad or overpriced stocks to attract the most bears, but there's no fun in having too many bears fighting over a small picnic basket.

Trade carefully.