In recent weeks, the only investors to rack up profits have been
the short-sellers, who have been riding the downward market to ai
their bets on falling stocks. But as stock prices appear to have
stabilized (at least for now), should these short-sellers start to
think about covering their positions? If they do, then they could
add buying pressure (since they buy back borrowed
to cover their positions), creating an unexpected rally in some of
the most heavily-shorted names.
In recent weeks, I've discussed the high short positions in
[Read "This Well-Known Stock Could be in Trouble"
[Read "4 Stocks that Could Profit from aShort Squeeze "
Here are three other stocks that look ripe for a rebound, with
as icing on the cake. Keep in mind, all short-interest data is as
of Aug. 15 -- which is the most recent set of data.
1. Charles Schwab Corp. (
Gain since Aug. 15: 0.5%
Fall from52-week high : 36%
It's very curious that short sellers hold more than 41 million
shares of this financial services stock (which is up 25% from the
prior two weeks). There's no reason to confuse Schwab with the big
banks that may be hard-pressed to deal with the ongoing crisis in
housing or the broadereconomy . The real knock against Schwab is
its presently weak profits. This is because the firm has always
made a decent return in its money-markets funds. But with the
Federal Reserve's rates at rock-bottom levels right now, Schwab
simply has no way to get any real spreads in the business.
Simply put, it's unclear which catalysts short sellers may be
identifying for a further downward move for Schwab -- shares
already sit near a six-year low, and currently trade at about $12.
But if short sellers seem unlikely to make money on the downside,
then what kind of upside might there be? Plenty -- if you've got a
one to two-year time horizon. It's all a matter of when interest
rates begin to rise: "We think rising interest rates are a near
certainty over a longer time frame, with calculable effects on
. The stock is currently trading at around 60% of our discounted
estimate of $22 per share," note the analysts at Morningstar.
Nearer-term catalysts also exist. For example, the recent market
volatility has brought heightened trading
, helping Schwab to boost trading
revenue. We'll have to wait until the current quarter's results are
released in late October, but this summer is shaping up to post a
solid rebound in market volume. Trading activity rose 11%
sequentially in July and a similar gain looks to be in the cards
for August as well.
, Schwab is suing major U.S. banks, accusing them of having
manipulated interest rates starting in 2007. Schwab says this has
"robbed" the company of hundreds of millions of dollars in
foresworn fees it could have generated. This lawsuit could either
take time to play out, or could move quickly if the banks seek to
clear this and all other litigation from their decks.
Of course, the best catalyst of all is rising interest in the stock
market. Individual investors have been shunning stocks for much of
the past few years and pulled even more money out in the month
ended Aug. 10, according to the Investment Company Institute (ICI).
A week later, on Aug. 17, the institute announced an unexpected
reversal: individuals actually poured $1.5 billion into domestic
stock funds that week. If investors feel emboldened to take
advantage of the sharp recent sell-off in the market, then a new
trend may be getting underway. Schwab, which has been collecting
thousands of new clients during the past few years, would surely
2. Timken (TKR)
Gain since 8/15: 1.2%
One of the key themes of 2011 has been the robust export
performance of mid-sized U.S. manufacturers. Sales into Brazil,
China and elsewhere have enabled many companies offset the
continued weakness here in the United States and Europe. You can
certainly see this
trend underway at Timken, one of the world's leading suppliers of
ball bearings, where sales are expected to rise 25% this year. The
company also makes a range of specialty steels and products for the
Timken has topped quarterly estimates four times in a row, leading
analysts to boost their
outlook. After this year's slump, shares trade for less than eight
times projected 2012 profits. Despite the solid momentum and cheap
valuation, shorts nearly doubled their position in just two weeks
to 1.1 million shares. They likely remember Timken saw sales slump
badly in 2009 and anticipate another global downdraft to come. But
Timken's solid quarterly results give no credence to this view.
Another strong quarter and shorts may need to run for cover,
creating a nice
3. Sealy (ZZ)
Gain since 8/15: 13%
Fall from 52-week high : 34%
Mattress maker Sealy briefly saw its shares dip below $2 before a
recent rebound. Short sellers are targeting the company as it keeps
. The market-share loss could be tolerated if so many potential
customers weren't holding off buying new mattresses right now.
Against all this bleak news, Sealy appears to be reversing recent
negative sales trends, boosting sales in the United States and
Europe at a 10% clip in the second quarter. This is the payoff from
an upgraded line of "Posture-pedic" mattresses that are squarely
aimed at Tempur Pedic's customers.
Short-sellers also notice the too-high levels of debt, which stands
at nearly $800 million. Only $2 million of this debt comes due in
the next 12 months, however. Meanwhile, earnings before interest,
) exceeds interest expense by about 50% (or $10 million) a quarter.
Obviously, a slip into
would pressure shares further as interest coverage wanes. But the
recent sales gains, along with a long-awaited replacement cycle for
increasingly lumpy mattresses, could help boost EBITDA, giving the
stock an "option-like" upside.
Risks to Consider:
These stocks will only benefit from any short-squeeze in a flat
or rising market. Any further market weakness would give even more
breathing room to short sellers.
Action to Take -->
The market has indeed looked a little healthier in recent sessions.
Any time you see a rally after a major pullback, you should give a
close look at the heavily-shorted names, because they can post
explosive near-term upside as shorts run for cover. In particular,
keep an eye on the three names I mentioned in this article, because
their upside potential goes beyond the short term.
-- David Sterman
The 10 Best Stocks to Hold Forever
One of these stocks has plowed through 8 bear markets and has
returned over 170,000% since 1972. Every $700 you invested back
then would be worth more than $1 million right now. Today, the
company is raising its dividends, spending billions to buy back its
own shares, making smart acquisitions, and is the dominant leader
in a $30 billion market. This stock is just one of the 10 best
"Forever" stocks to own today.
Disclosure: Neither David Sterman nor StreetAuthority, LLC hold
positions in any securities mentioned in this article.
© Copyright 2001-2010 StreetAuthority, LLC. All Rights Reserved.