The past year has been fairly good for airline stocks, and Hawaiian Holdings'  has been no exception. While the stock hit a rough patch in early 2013, it still has managed to rise from around $6 to $7 over the last 52 weeks.

HA Chart

Hawaiian Holdings 1 Year Price Chart, data by YCharts


Despite this success, a growing contingent of short sellers are betting against the stock. As of mid-August, 22.5% of Hawaiian's float -- the number of shares held by non-insiders -- had been sold short, and this number has been steadily increasing. These short sellers could be in for a lot of pain soon, as Hawaiian appears to be set up for solid earnings growth over the next 18 months.

Growing short interest
Many investors have remained skeptical of airline stocks despite the sector's resurgence since the Great Recession. As a result, it is not surprising that airline stocks often have a high short interest. (Short sellers are investors who bet that stocks will decline.) For Hawaiian, this figure has bounced around between 5% and 10% for most of the last several years.

HA Percent of Shares Outstanding Short Chart

HA Percent of Shares Outstanding Short, data by YCharts

However, short interest began to surge in February, perhaps due to Hawaiian's weaker than expected Q4 earnings report, which was released in late January. Short interest has continued to build over the ensuing six months despite Hawaiian's surprisingly good Q2 earnings report released in July.

HA Percent of Shares Outstanding Short Chart

HA Percent of Shares Outstanding Short, data by YCharts

Risky business
Short sellers are betting that Hawaiian's stock will fall over the coming months and years. This is a very risky bet insofar as the company appears to be turning a corner. Hawaiian's unit revenue has fallen for four consecutive quarters, but the midpoint of management's Q3 unit revenue guidance calls for a return to growth.

Moreover, Hawaiian Holdings CEO Mark Dunkerley confirmed on the company's July conference call that industry capacity between the U.S. mainland and Hawaii has begun to decline. This reduction in competition should lead to even stronger unit revenue growth -- and a return to strong year-over-year profit growth -- in Q4.

Industry analysts expect this uptrend to continue. The average estimate calls for Hawaiian's adjusted EPS to rise from just $0.94 this year -- a slight reduction from 2012 EPS of $1.06 -- to $1.34 in 2014. That puts the company's forward P/E ratio at a skimpy 5.2.

Get ready for the rebound
Clearly, short sellers -- and the market as a whole -- are skeptical that Hawaiian can produce the earnings growth that analysts currently project. If Hawaiian proves doubters wrong, the stock could be a prime candidate for a short squeeze. Based on recent trading volumes, it would take 13 days for all short sellers to cover their positions, up from just four days earlier this year.

HA Days to Cover Short Chart

HA Days to Cover Short, data by YCharts

In other words, if a positive earnings surprise, better than expected guidance, or other upbeat corporate news inspires many shorts to close their positions, the result could be a buying frenzy. This in turn would drive Hawaiian's share price significantly higher. Given Hawaiian's compressed multiple and improving earnings, the stock appears to offer a very attractive risk to reward trade-off today.

The potential for a short squeeze is one factor making Hawaiian Airlines an attractive investment candidate today. But it's not the only airline that's well-positioned to deliver great returns for investors. The Motley Fool's new special report on the airline sector highlights two airlines that are breaking all the rules by keeping costs low and avoiding direct competition -- leading to enviable profits. Click here to get your copy -- it's free!

The article Short Sellers Attack Hawaiian Holdings originally appeared on Fool.com.

Fool contributor Adam Levine-Weinberg owns shares of Hawaiian Holdings and is long October 2013 $6 calls on Hawaiian Holdings. The Motley Fool has no position in any of the stocks mentioned. 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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