Interested in rebound candidates? We are, which is why we created the list below of stocks with high short floats (short-squeeze candidates) and insider buying.
Our reasoning is this:
Short-selling is a strategy to cash in on a stock dropping in price: The short-seller borrows shares today, immediately sells them, and then buys them back at a future date (and hopefully at a lower price) to return them to the owner and keep the difference as profit. The number of shares shorted indicates how bullish or bearish those investors currently are on a company.
When a stock becomes highly shorted amid deep pessimism, it can reach a sort of tipping point referred to as a "short squeeze." There are so many shares currently shorted that any bump up in price triggers a cascade in which short-sellers have to cover their positions by buying back the stock, which causes the stock to rally even further.
One way to find short-squeeze candidates is simply by looking at a company's short float. The short float of a company is the percentage of shares in a short position (being short sold by short-sellers) as a percentage of the total amount of shares available on the market (share float). Short-sellers make money when the share price of a stock falls. Therefore, if the short float is high, short-sellers are really confident that the share price is going to fall.
Because investors frequently pay attention to the behavior of short-sellers, a high short float could make investors nervous about a stock, which might in turn cause the share price to fall (like a self-fulfilling prophecy). But as mentioned above, any increase in price could result in the opposite outcome.
For this screen, we consider a stock with a short float greater than 20% of the total share float.
Among those names, we wanted to find companies that have been experiencing insider buying over the past six months.
Many analysts follow insider buying trends because, after all, insiders know more about their companies than anyone else. Their investment activity is closely monitored and can tell us a lot about where they feel the business is heading.
Insider buying is represented as a percentage of the share float. Companies experiencing insider buying over the past six months provide an indicator that insiders think the stock is undervalued at current levels. Inversely, insider selling serves as a negative indicator.
Insiders think these stocks are good short squeeze candidates, do you agree? (Click here to access free, interactive tools to analyze these ideas.)
1. Diamond Foods
2. ITT Educational Services
3. Iridium Communications
5. Overseas Shipholding Group
6. Collective Brands
7. Rex Energy
8. Seattle Genetics
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.
Kapitall's Becca Lipman and Eben Esterhuizen do not own any of the shares mentioned above. Data from Yahoo! Finance.
The Motley Fool owns shares of Iridium Communications. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.