One of the quickest and easiest ways to make gains in the
stockmarket is to own a stock that's experiencing ashort squeeze .
A short squeeze happens when a stock is heavily shorted, but
unexpected good news or other factors start lifting the price
higher. Spooked by the possibility of losing more money, short
sellers rush to cover their short positions, resulting in an upward
buying pressure that powersshares higher. As the stock rises, even
more short sellers are forced to close their positions by buying
back the stock. This creates an avalanche effect that can send
shares skyrocketing.
One of history's most dramatic short squeezes occurred in 2008,
when Porsche SE announced it would raise its stake in Volkswagen
to 75%. The announcement pushed Volkswagen 187% higher, briefly
making it the most valuable company on Earth. Not all short
squeezes are this dramatic, but they still create a powerful
opportunity for nimble investors toprofit .
When investigating potential short squeeze candidates, you can
check a stock'swill experience a short-squeeze rally. In addition,
it's important to focus on relatively solid stocks that are heavily
shorted but are trending upward. Existing upward momentum combined
with a high short ratio may be thecatalyst needed to spark a
short-squeeze buying explosion.
Here are three stocks I have identified as strong candidates for
a potential short squeeze. They are all strong stocks that
currently boast high short ratios, so even the smallestbullish
event could send these stocks soaring...
1. Royal Bank of Canada (
RY
)
Not only does this bank stock provide a 4.2%dividend yield , but
it's among the largest banks in North America, with more than $800
billion in assets. Canada missed out on the financial rout suffered
in the United States. However, despite a strongbalance sheet , many
investors believe Canada is on shaky ground financially and have
shorted this flagship bank.
The short ratio is above 25 with more than 13 million shares
short. A daily close above $60 would trigger my long entry into
this stock.
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2. Chungwa Telecom (
CHT
)
This Taiwanese telecom company boasts a dividend yield of more than
4%, but it has a short ratio of more than 25 with more than 4
million shares short. Chungwa is the largest telecom company in
Taiwan but investors are afraid the nation cannot sustain its
growth rate. Shares have been uptrending despite the heavy short
interest, as you can see in the chart below. This stock looks like
a buy at these levels.
3. Thomson Reuters (Nasdaq: TRI)
The second fiddle to Bloomberg in the financial information
industry, Thomson Reuters has the highest short ratio of the three
stocks listed here, at 35. Yielding nearly 5%, the stock is a
favorite short candidate as investors challenge its ability to
sustain the growth it needs to stay afloat.
Thomson Reuters earns more than $1 billion in freecash each year
and has a solid balance sheet. The high short ratio makes it an
ideal candidate for a short squeeze. Unlike the other two stocks,
Thomson Reuters has been downtrending since mid-September. My
strategy would be to buy this stock on a breakout above the 200-day
simplemoving average at $28 and expect this rise to trigger an
aggressive short-squeeze move higher.
Risks to Consider:
Investors have reasons to short stocks. No one knows for
certain that a short squeeze will happen. All we can do is use data
to choose the stocks most likely to experience a short squeeze.
Investing in the hopes of a short squeeze occurring is very risky
and speculative, so always be sure to use stops and position size
based on your risk tolerance when investing.
Action to Take -->
However, it is within this risk that huge profits exist. I like all
three of these stocks as potential short squeeze candidates. In
addition, their high dividend yields and solid balance sheets make
these stocks wise choices for long-term portfolios.