5 Short Squeezes Just Waiting to Happen

There are apparently plenty of worrywarts out there.

At a time when the markets are now hitting new all-time highs -- finally -- there is no shortage of bearish perspectives. Let's check out some of the pessimistic hot spots.

The stock exchanges post short interest twice a month, giving us 24 snapshots a year of the number of shares that are betting on a particular stock to decline in the near future.


Shorts don't have it easy. Unlike longs that can only lose 100% of their investment, shorts are eyeing even bigger hits if the stocks go on to more than double. They often cover before that, but that is why eyeing companies with heavy shorting activity can be interpreted by contrarian investors as a bullish indicator.

The more shorts, the easier it is for a short squeeze to take place where the naysayers prop a stock higher on the way out of their positions.

Let's check out five stocks that are currently trading at 52-week highs in the number of shares sold short as of mid-February.

 

2/15/13

8/15/12

Vringo

15.7 million

4.0 million

Sirius XM Radio

406.3 million

259.8 million

Baidu

10.6 million

7.3 million

MercadoLibre

8.0 million

3.9 million

Amarin

24.9 million

21.7 million

Source: Barron's.

Feeding the bears
Vringo was a fringe app maker early last year. Its flagship program was an application that generates video ringtones, hence the name. However, it wound up as the top bidder for some old Lycos search-related patents, and then it got litigious.

Vringo's been having a fair amount of legal success as it goes after dot-com giants. Its more ambitious claims have been shot down, but it's also come out ahead in some cases. The only real surprise is that its short interest should be peaking now when its trading volume was so much higher in October and early November of last year.

Sirius XM has been one of the market's biggest winners since bottoming out four years ago. The gains have been well earned. There is little that has gone wrong at the satellite radio provider, especially over the past year as it continually jacked up its guidance for 2012.

However, now that another company has taken majority control of Sirius XM with more than 50% ownership, bears feel that it will be all downhill from here. That's a dangerous notion. Sirius XM has authorized $2 billion in share repurchases, and that could go a long way toward boosting the stock higher and shaking out the shorts.

Baidu is China's leading search engine, but the shares have been under pressure lately. There are sector-, country-, and company-specific reasons for the skittishness.

Investors fear that the historically restrictive country may tighten the clamps on Internet freedoms. There's also the surprising competitive threat posed by the company behind China's leading Web browser. It introduced its own search engine this past summer, and has gained surprising traction.

However, as I pointed out yesterday, Baidu is too cheap to be shorted this extensively. The stock is trading for just 13 times next year's profit target. Baidu's growth may have decelerated, but it's still growing at a much faster pace than its low earnings multiple suggests.

MercadoLibre runs the leading online marketplace through most of Latin America. This is a robust growth market given the early stage of Internet migration in most of MercadoLibre's markets. MercadoLibre posted solid quarterly results last week. Revenue and earnings rose 31% and 48%, respectively, in local currencies.

Valuation has been the biggest bone of bearish contention. MercadoLibre commands a trailing earnings multiple of 38, though that drops down to 25 if we look out to next year.

Finally, we have Amarin.

After years of testing and development, Amarin finally launched Vascepa -- the first FDA-approved medication that treats patients with very high triglyceride levels -- this year.

This could be a huge market. Amarin estimates that 4 million adults in this country alone have very high triglyceride levels that could benefit from Vascepa. However, the stock is trading near its 52-week low at the moment. This would indicate that the bears are winning, but you never know when the next positive development will materialize.

Waiting is the hardest part
All five of these companies have their challenges, but it's not as if any of them is going away anytime soon. Patient investors may be rewarded with short squeezes soon at the first sign of a positive catalyst.

With so many of the big finance firms getting bad press these days you may be inclined to stay away from the sector entirely, but that could be a huge mistake. In fact some of the best opportunities over the next few years can be found there, including one small, under-the-radar bank. It's been called one of The Stocks Only the Smartest Investors Are Buying. You can learn about it, and more, in The Motley Fool's exclusive free report. Just click here to keep reading.

The article 5 Short Squeezes Just Waiting to Happen originally appeared on Fool.com.

Longtime Fool contributor Rick Aristotle Munarriz has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Baidu and MercadoLibre. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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