Short-selling is a trading technique that allows investors to profit on a stock's decline in price. The short-seller borrows the stock today, immediately sells it, and agrees to buy it back and return the stock at a future date. That way, the short-seller gets to keep a profit if the stock's price declined.
Short squeeze opportunities arise when a stock becomes highly shorted. As there are fewer short sellers to sell the stock, any significant move up can trigger a short squeeze in which short-sellers must close out their positions (buying back the stock), causing the stock to rally even higher than before. If you are holding the stock, this is a good event.
One way to look for short squeeze opportunities is by finding highly shorted stocks with a vote of confidence from smart money investors such as institutional investors (i.e., hedge fund managers and mutual fund managers).
To demonstrate this technique, we ran a screen on stocks with short floats above 20% (meaning over 20% of available shares -- called the share float -- are currently being shorted ... a very high number).
We screened these stocks for those with significant net purchases from institutional investors over the current quarter, indicating they believe in these names.
Do you think these stocks will soon experience a short squeeze? Use this list as a starting point for your own analysis.
List sorted by short float. (Click here to access free, interactive tools to analyze these ideas.)
List compiled by Eben Esterhuizen, CFA:
1. The McClatchy Company
2. Diamond Foods
3. ITT Educational Services
4. Overseas Shipholding Group
5. Rex Energy Corporation
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.
Disclosure: Kapitall's Eben Esterhuizen and Alexander Crawford not own any of the shares mentioned above. Short data sourced from Finviz, institutional data sourced from Fidelity.