by Fred Fuld III
Back in 2015, Keurig Green Mountain, Inc., jumped about 75% in one day, due to a takeover. The hedge fund manager, David Einhorn had a short position in the stock, which generated an enormous loss. But even a rumor of a takeover can send a stock higher, or even just good news, causing short sellers to scramble to cover their positions, creating what is called a short squeeze.
A technique that stock traders often use is buying short squeeze stocks. Here is a more extensive explanation of what a short squeeze stock is and what a short squeeze is.
When you short a stock, it means that you expect to make money from a drop in the price of a stock. Technically what happens is that you borrow shares of a stock, sell those shares, then buy back those shares at a hopefully lower price so that those shares can be returned. Of course, this all happens electronically, you don’t actually see all the borrowing and returning of shares; it just shows up on your computer screen as a negative number of shares.
Short sellers can make a lot of money, but sometimes when the stock moves against them, and begins to rise, the short sellers jump in at once to buy shares to cover their position. This is called a short squeeze. When a short squeeze takes place, it can cause the stock to rise fast and hard. Any type of positive news can trigger the short squeeze.
So other traders take advantage of this situation by looking for stocks to buy that may have a potential short squeeze. Here is what they look for:
Short Percentage of Float ~ The float is the number of freely tradable shares and the short percentage is the number of shares held short divided by the float. Amounts over 10% to 20% are considered high, and potential short squeeze plays.
Short Ratio / Days to Cover / Short Interest Ratio -This is probably the most important metric when looking for short squeeze trades, no matter what you call it. This is the number of days it would take the short sellers to cover their position based on the average daily volume of shares traded. This is a significant ratio as it shows how “stuck” the short sellers are when they want to buy in their shares without driving up the price too much. Unfortunately for the shortsellers, the longer the number of days to cover, the bigger and longer the squeeze.
Short Percentage Increase ~ This is the percentage increase in in the number of short sellers from the previous month.
Let’s take an example. Cars.com Inc. is a stock that is heavily shorted. As a matter fo fact, 23.1% of the float is shorted. In addition, the number of shares shorted has increased by almost 2% over the last reported two week period. Finally, the short interest ratio is 25. That means it would take the short sellers 25 days to cover their positions, based on the number of shares that trade each day on average.
So what stocks are heavily shorted that may be worth a closer examination? Check out the following list, but be aware, that often some stocks are heavily shorted for a reason.
| Company | Symbol | % change | % of Float | Days to cover |
| Invacare Corporation | IVC | 2.5 | 28.9 | 41 |
| Zoe’s Kitchen | ZOES | 1.6 | 35.1 | 35 |
| Seritage Growth Properties | SRG | 2.7 | 34.1 | 33 |
| Maxar Technologies Ltd. | MAXR | 4.8 | 7.2 | 32 |
| McEwen Mining | MUX | 0.9 | 19.6 | 31 |
| Lannett Company, Inc. | LCI | 1.7 | 53 | 31 |
| Lee Enterprises, Inc. | LEE | 0.5 | 8 | 29 |
| AU Optronics Corp | AUO | 1.6 | … | 27 |
| Acushnet Holdings Corp. | GOLF | 2 | 15.9 | 26 |
| Gildan Activewear Inc. | GIL | 1.4 | 3.7 | 26 |
| The Buckle, Inc. | BKE | 0.1 | 33.8 | 25 |
| Cars.com Inc. | CARS | 1.9 | 23.1 | 25 |