5 Tightly Squeezed Stocks

Everyone loves a winner. It's reasonable to assume then that everyone hates a loser. Yet with investing, that's not always the case.

Contrarian investors love to pick through stocks that others have cast away. Value investors are the garbage-divers of the marketplace. Conversely, when stocks have a big run-up, some investors like to bet against them. They're called short sellers, and they bet that a stock is primed for a fall.

What goes up must come down
Essentially, a short seller borrows shares from someone who is long the stock. For example, if I short 100 shares at $10, I am credited with $1,000. My hope is that the shares drop below $10, so I can repurchase the shares at a lower price and keep the difference. (Here's more on how short selling works.)

Now, just because a stock lands high on a short interest list, that isn't a cause for concern. Sometimes, it can even work in your favor. You see, a person who is short a stock has unlimited loss potential. If he or she made the wrong bet and the stock price rises -- and rises some more -- that person can continue losing money all during the time the stock is climbing. So shorts tend to "cover" their positions quickly if things don't go their way. That can fuel further jumps in the stock price, which can cause more shorts to cover. It's called a "short squeeze," and it can make a stock's price rise dramatically.

Over on Motley Fool CAPS, tens of thousands of investors like you are looking over these same stocks. Some they like, some they don't, and they all vote on how they feel about them. Sometimes, though, the lists of stocks that Foolish CAPS players like cross swords with those that short sellers don't.

Maybe we can use that to our advantage. Here's a list of stocks that have some of the highest short interest ratios. The ratio measures how many days it would take for all of the shorts to cover their positions. It's calculated by dividing the number of shares of a company's stock that's sold short by the average number of shares traded over the course of a single day. For stocks with a very high number of days to cover that experience, a short squeeze means that the rise in price can go on for a very long time.

This just also happens to be a list of stocks that CAPS players think highly of.

By using the collective reasoning power of the 23,000-strong investor community on CAPS, we've identified a handful of stocks that are looked upon highly that also just might be ripe for a short squeeze.

Of course, this isn't a list of stocks to buy. Maybe these stocks have some serious problems that warrant the high short interest. What do you think? Will they be squeezed or not?

Speak up
It's your time to have a say. On Motley Fool CAPS, your opinion counts just as much as the short sellers. Tell us what you think: Squeeze 'em till it hurts, or short 'em till the sun don't shine. May the best argument prevail.

Fool contributor Rich Duprey does not own any of the stocks mentioned in this article. You can see his holdings here. The Motley Fool has a disclosure policy.