5 Strong Stocks Poised For A Breakout

By Matthew McCall | December 08, 2010 AAA

With the U.S. stock indexes sitting near two-year highs there are a large number of stocks already at highs or at least close to breaking out. The short sellers covering their positions and creating a buying frenzy often fuel stocks that are on the verge of breaking out.
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One way to search for potential breakout candidates is to search for strong stocks that have a high short interest ratio. The short interest ratio measures the amount of trading days it would take for all the shorts to be covered with average volume. For example if a stock trades on average two million shares per day and has ten million shares short it would take five days to cover all the shorts. Thus the short interest ratio would be 5.0. (For more, see Short Interest: What It Tells Us.)

Below are five stocks that have high short interest ratios that are either on the verge of breaking out or just did breakout recently.

ViaSat (Nasdaq:VSAT) has a short interest ratio of 17.3 and 11.9% of its float is short. The satellite company designs and produces its products for the government and private customers. A recent breakout from a two-month consolidation has led the stock to the best level in over 10 years. The stock has an average valuation with a forward P/E ratio of 27.6, but the technicals point to higher prices. (For more, see Short Selling: What Is Short Selling?)

Not Exactly Cheap
Advent Software (Nasdaq:ADVS) has a short interest ratio of 26.9 and 27.7% of its float is short. The software firm offers products to the investment management sector to help information flow between both internal and external parties. Similar to VSAT, the stock is not a value play with a forward P/E ratio of 32.4 - however, the chart is impressive.

Westinghouse Air Brake Technologies Corp (NYSE:WAB) has a short interest ratio of 12.6 and 6.3% of its float is short. The company provides technology-based equipment and services for the rail industry. Their products range from parts for existing freight cars to the building of new commuter locomotives.WAB is more of a value play with a forward P/E ratio of 17.8. This is even after a big run-up to begin the month of December. (For more, see The Basics Of Outstanding Shares And The Float.)

A Pricey P/E Ratio
Shutterfly (Nasdaq:SFLY) has a short interest ratio of 9.7 and 13.5% of its float is short. This is one company many investors have either used or heard of because the average consumer will use the photography website to personalize and share photos.The stock is up nearly 100% in 2010 and the forward P/E has ballooned to 53.8; clearly the stock is a momentum play rather than a value stock.

A Lower P/E Play
RPC Inc. (NYSE:RES) has a short interest ratio of 7.4 and 16.6% of its float is short.RES is an oil and gas service company with two divisions (technical services and support services) mainly in the United States. The stock has been very strong as it hits new all-time highs on a regular basis. With a forward P/E ratio of only 14.1, the stock has more room to run. The key, however, is not to chase the stock, but rather to buy on pullbacks.

Bottom Line
The reason short interest ratio can be helpful to picking stocks that are on the verge of breakout is because it scares the shorts when a stock reaches a high, and they all tend to cover their positions at the same time. A short seller must buy back the shares to cover, and suddenly the bulls are joined by the bears in creating buying pressure. (For more, see Interested In Short Interest Leaders?)

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