Bears are running away with this market.
Short interest -- the number of shares sold short as wagers that stocks will continue to head lower -- rose by 5.5% on the New York Stock Exchange between Aug. 31 and Sept. 15. Short interest rose by an equally problematic 4.2% for Nasdaq-listed companies.
The worrywarts were right. Stocks generally drifted lower during the latter half of last month. However, there comes a time when the pessimism is overdone.
I routinely like to check the stocks with the highest short-interest ratios. This is a pretty simple metric that basically divides the amount of shares sold short by the average number of shares traded daily. The higher the ratio, the more disruptive a short covering rally can be.
Bears aren't dumb. Heavily shorted stocks collect grim outlooks for a reason. However, when quality stocks begin accumulating bearish wagers, I start to get tingly. If positive catalysts begin to show up, bears scrambling to cover their short positions can result in dramatic rallies.
Let me go over five attractive stocks with short interest ratios of 20 days or better. In other words, it would take 20 trading days of typical trading volume just to clear out the shorts.
|
Company |
Shares Short |
Daily Volume |
Days To Cover |
|---|---|---|---|
|
Mindray Medical (NYSE: MR) |
18.7 million |
295,164 |
63 |
|
Active Network (Nasdaq: ACTV) |
2.1 million |
58,098 |
36 |
|
hhgregg (NYSE: HGG) |
9.5 million |
280,523 |
34 |
|
Tesla Motors (Nasdaq: TSLA) |
21.2 million |
688,740 |
31 |
|
Zipcar (Nasdaq: ZIP) |
5.3 million |
231,642 |
23 |
Source: Barron's.
Feeding the bears
Mindray Medical makes ultrasound equipment. The stock has been dogged like many Chinese equities, but it would be a mistake to lump Mindray with the country's speculative investments. For starters, Mindray has been paying annual dividends -- and hiking its payout rate annually -- since going public five years ago.
Despite the perception that hospitals are scaling back on medical equipment, Mindray's global reach is helping it continue in the right direction. Analysts see revenue growing 19% this year and 16% come 2012. Mindray is trading at a compelling 16 times this year's projected earnings and 14 times next year's profit target.
Closer to home, Active Network has cornered the market when it comes to registrations for outdoor fitness events. Its ActiveWorks platform is a popular choice for organizers of 5k runs, fishing tournaments, and triathlons. Its Active.com website is a hub of local events. Its popular C25K smartphone app is turning couch potatoes into running enthusiasts.
Active Network went public at $15 earlier this year, and it's now trading just below that. Revenue climbed 21% in its first quarter as a public company. Profitability has been a challenge, though the pros see Active Network hitting that finish line next year with its scalable model.
It's easy to see why investors are bearish on hhgregg. When it comes to consumer electronics, they've seen Circuit City liquidate and Best Buy (NYSE: BBY) post several straight quarters of declines in earnings and same-store sales.
It's not right, though. Unlike Best Buy and its reliance on small-ticket media items that are sold cheaper online or distributed digitally, hhgregg counts on appliances and mattresses that aren't easily fulfilled by nimbler e-tailers.
Tesla Motors was making electric cars before they were cool. Its Tesla Roadster is slick -- but expensive. Let's see how things change once the more accessible Model S sedan hits the market next year with its base price below $50,000 after tax rebates.
Speaking of cars, Zipcar is growing quickly. The popular auto-sharing service saw revenue grow 34% in its latest quarter. This isn't a fluke. Revenue from its four original metropolitan markets has surged 25% over the past year. The asset-sharing model for big-ticket assets that sit idle is too strong a theme to ignore.
Waiting is the hardest part
Some of these catalysts may not show up right away. General market pessimism may keep some of these short squeezes from materializing.
Then again, even bears need exit strategies -- especially for these five companies that have no intention of going to zero.
If you want to see when these five companies turn on bears, considering adding them to MyWatchlist.
- Add Zipcar to My Watchlist.
- Add Tesla Motors to My Watchlist.
- Add Mindray Medical International to My Watchlist.
- Add hhgregg to My Watchlist.
- Add Active Network to My Watchlist.
