Playing a short squeeze requires a skill set that most investors simply do not have: Discipline, the ability to take losses, and a desire to knowingly go against some of the smartest and savviest money on the street. Its a game for only the very brave or the very stupid. (I'm occasionally both).
Since our office plays both the long and short side, I look at potential short squeezes both defensively and opportunistically.
Short squeeze scenarios sometimes occur when the fundamental short story (based on revenue slow downs or other macro factors) and the technical picture are opposed to each other. Sometimes, the fundies get ahead of themselves trying to amnticipate the market. When they figure something out that no one else has, they may try to play that edge -- sometimes a bit too early. Meanwhile, it takes a good long time for the story to make its way around the street.
Markets are efficient, but only eventually. Until then, shorts must occassionally endure some pain. Not to be too sarcastic, but there is a lag before a good short story has an impact -- the "pre-efficienct" period; Harley Davidson (HDI) is the classic example of a great short story simply not gaining any traction.
Three good squeeze examples, past and present:
ACTM: A few years ago -- around May 2000 -- I played a widely shorted stock at the time for a squeeze: Act Manufacturing (ACTM then, ACTMQ now).
The short interest had hit 30%, and there were increasingly fewer shares to borrow. After a big sell off, the stock started to ramp up on increasing volume, a technical sign that a squeeze is in the works. It was in the low $20s when we bought it, and soon popped to $30.
Thats not the end of the tale: The moral of the ACTM story was that the nimblest of traders might have played the squeeze well, but the shorts were -- in the end -- ultimately correct: Buyers who overstayed their welcome got mangled as ACT Manufacturing went bankrupt. It now trades for less than a penny. Ouch.
A more contemporary potential squeeze play is Goodyear Tire (GT). Goodyear is an interesting turnaround story - the firm has a new CEO and a 5% dividend yield; Its a cyclical well positioned for an economic turnaround. They certainly will benefit from all the new cars sold due to 0% financing as they need new tires.
GT has over 20 million shares sold short -- a 12% short interest. The stock trades about 2 million shares a day, so it will take 10 days to cover. With the stock down from over 60, I suspect that some shorts are ignoring the fundamental turnaround; (We own GT between 8.75 and $9.60 for ourlonger temr accounts; Our 1st upside target on GT is $12-13)
That's a typical short squeeze scenario -- the fundamentals improve, a smallish float (163m shares) and a large open short position. Any squeeze here could send the stock up a couple of bucks (maybe more). And, you get paid 5% while-u-wait.
Liquid Metal LQMT: One last type of short squeeze we haven't seen much of lately is due to the slowdown of the IPO market: The oddity of a tiny float and an IPO lock up expiration. My favorite example -- Liquid Metal (LQMT): It has only a 5 million share float (but 41 million shares outstanding), and a short interest of 57% -- thats 22 days to cover!
This is the sort of situation where a squeeze looks immiment, right? Wrong. Merrill Lynch brought the company public on May 22, 2002 at $15; That means as many as 35 million insider (and VC) shares could be coming loose on November 18nd.
LQMT currently trades at about $6.50 - 7, making it a "broken" IPO (it came public at $15). I suspect there could be some panic selling here when the lockup ends. Its a stock I definitely wouldn't want to own, and would short if I could -- but there is hardly any shares left to borrow. Ironically, the end of the lock up will only make free up more shares for the shorts to borrow!
You can find this data from various sites on line:
Yahoo Profile,
the NASDAQ site, and
IPO.com (click on November 18, 2002).
BTW, there are several short interest screeners (See HighMark Funds for an example) that you can use to find stocks with high short interest. I prefer a 10 - 20 % short interest; Less is too little, and a whole lot more often indicates a differnet scenario ('though you can never tell). Example: when a Preferred has a very good yield, and the common is very liquid (i.e., trades a lot of shares) one strategy is a paired trade: buy the P'fd while shorting the common. You capture the yield for free, with little risk of the trade going against you. Those situations almost never produce a squeeze because the shorter is hedged with the Preferred, which usually trades more or less in tandem with the common.
Last thoughts:
Most investors weren't disciplined enough to sell their beloved favorites when the crash hit in 2000; For the average amateur, trying to handle a short squeeze is like stepping in front of a train of savvy Short Sellers -- it could be financial suicide.
Barry Ritholtz is Chief Market Strategist at the Maxim Group. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Ritholtz appreciates your feedback and invites you to send it to ritholtz@aol.com.
Barry L. Ritholtz
October 31, 2002
.
If you would like a free subscription to my bi-weekly market comments, please send an email to
email to Ritholtz@aol.com, including the word "SUBSCRIBE" in the subject matter line. Previous market comments are archived
here.
Copyright © 2002 Barry L. Ritholtz, All Rights Reserved worldwide. May not be copied, stored or redistributed without prior, written permission.
Home
