Given the dog days of summer, I thought it might be worth
looking at a few companies which have potentially bullish chart
set ups and high short interest ratios. The hope of this
screen is to come up with a few potential short squeezes and
stocks which have fuel to generate some profits. Here are
three picks which caught my attention:
Deckers Outdoor (
), Zacks Rank #2 (Buy).
DECK is a footwear and apparel manufacturer and marketer.
Technically, DECK shows signs of forming a base and a clean
rally over the $60 level could confirm a leg higher. The
base pattern sets up the potential for a rally into the $90 area
with $77 to $80 providing resistance along the way. As the
stock formed the bottom in the $30 region, there was a flaring of
volume which suggests a change of ownership. The recent
rally has seen light volume. This is a bit concerning as it
suggests limited interest, but may be consistent with the market
pausing before the next leg higher.
The short interest in DECK has risen nicely through
2013. Since the middle of January 2013, the short interest
ratio has risen from 5.68 to 14.15. The short interest ratio
looks to be toward the higher end of the historical range.
The short interest ratio built as the volume in the stock
dropped off in recent months. There is an old saying in the
trade, "never short a quiet market". We'll see if this
saying comes true.
The fundamental backdrop for DECK appears constructive.
Although there are worries about a slowdown in consumer spending
given falling refinance activity and sluggish growth in
disposable income, the labor market has been producing jobs and
the bottom up story appears firm.
Analysts have tended to raise their profit outlook for DECK
over the past 30 days. There were seven upward revisions
and no downward revisions to the 2013 outlook. For 2014,
there were five upward revisions and two downward
DECK is reasonably priced at 13.9x expected 12 month earnings
per share. The median value is 14.9 and the min and max
values are 5.6 and 27.5 respectively.
Stewart Information Services (
), Zacks Rank #3 (Hold).
STC provides real estate services which include global
residential and commercial title insurance, escrow, and
settlement services. Although there is an international
footprint, it is small. About 6% of revenues in the June quarter
were linked to international operations.
Technically, STC has been in a powerful uptrend and recently
broke out of a triangle pattern to the upside. It looks to be
continuing higher with its uptrend. The triangle
argues for a move toward the $37, and traders may see the $30
level as support. The pattern would be in question on
a breach of the $28 area.
The short interest ratio was 14.5 as of the middle of July and
is up from 5.4 at the start of the year. The short interest
ratio is on the upper end of the one year range and has swung
higher since May. Given the run up in prices, some of these
sellers may be under pressure to cover.
Fundamental dynamics for the company are mixed. The
Zacks 2013 Consensus Earnings per Share Estimate has risen $0.18
over the past 30 days to $2.64, but the 2014 estimate has been
cut $0.65 to $3.25. The expected growth rate is strong at
23%, but compressing. The recent rise in mortgage
rates may be a headwind to the bull story.
Valuation is ok with the forward 12 month PE ratio at
10.4. Earnings have been volatile for the company.
Free cash flow has been improving, but has tended to follow
the direction of the economic cycle.
Dynamics Materials Corporation (
), Zacks Rank #3 (Hold).
BOOM operates in the explosion metal working space.
Technically, BOOM is has broken out of a falling wedge
formation after forming a "V" looking base. The text book
analysis argues for a move toward $28, but the top of the channel
off the recent low could slow the rally. A retest of the
wedge and the base around the $18 area could be seen as
The short interest ratio for BOOM is 10.2 and near the top end
of the one year range. The ratio is also on the top side of
the 10 year range. With signs of stronger manufacturing
activity, this base could provide fuel for a rally. U.S.
and European manufacturing PMIs have firmed and Chinese commodity
imports found a firmer tone in July.
Fundamentally, analysts have been reducing their earnings
estimates over the past 30 days. The 2013 Zacks Consensus
Earnings per Share Estimate has declined $.07 to $0.75 and the
2014 EPS consensus has dropped $.01 to $1.32.
The 12 month forward PE ratio is 17.9 and under the 10 year
median value of 19.2 and the price to sales ratio is 1.3 near the
10 year median.
Playing for a short squeeze is a contrarian trade and it is
hard to match up a company with a strong earnings outlook with a
short base. Shorts are usually looking for companies with
weak earnings to sell - not strong earnings momentum. Given
the Zacks Rank #2 for DECK, it may hold the greatest potential
for price gain. It has the strongest trend in upward
earnings revisions, a short base, and favorable chart set up.
STC and BOOM are more neutral names in terms of earnings
revisions, but are carrying favorable looking chart patterns and
price gains seem to be squeezing shorts.
DYNAMIC MATLS (BOOM): Free Stock Analysis
DECKERS OUTDOOR (DECK): Free Stock Analysis
STEWART INFO SV (STC): Free Stock Analysis
To read this article on Zacks.com click here.