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.
IN PICTURES: 9 Simple Investing Ratios You Need To Know

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?)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Related Articles
  1. Economics

    Investing Opportunities as Central Banks Diverge

    After the Paris attacks investors are focusing on central bank policy and its potential for divergence: tightened by the Fed while the ECB pursues easing.
  2. Stock Analysis

    The Biggest Risks of Investing in Pfizer Stock

    Learn the biggest potential risks that may affect the price of Pfizer's stock, complete with a fundamental analysis and review of other external factors.
  3. Stock Analysis

    Allstate: How Being Boring Earns it Billions (ALL)

    A summary of what Allstate Insurance sells and whom it sells it to including recent mergers and acquisitions that have helped boost its bottom line.
  4. Options & Futures

    Cyclical Versus Non-Cyclical Stocks

    Investing during an economic downturn simply means changing your focus. Discover the benefits of defensive stocks.
  5. Markets

    PEG Ratio Nails Down Value Stocks

    Learn how this simple calculation can help you determine a stock's earnings potential.
  6. Investing Basics

    How to Deduct Your Stock Losses

    Held onto a stock for too long? Selling at a loss is never ideal, but it is possible to minimize the damage. Here's how.
  7. Investing

    What’s the Difference Between Duration & Maturity?

    We look at the meaning of two terms that often get confused, duration and maturity, to set the record straight.
  8. Economics

    Is Wall Street Living in Denial?

    Will remaining calm and staying long present significant risks to your investment health?
  9. Stock Analysis

    When Will Dick's Sporting Goods Bounce Back? (DKS)

    Is DKS a bargain here?
  10. Investing News

    How AT&T Evolved into a Mobile Phone Giant

    A third of Americans use an AT&T mobile phone. How did it evolve from a state-sponsored monopoly, though antitrust and a technological revolution?
  1. What does low working capital say about a company's financial prospects?

    When a company has low working capital, it can mean one of two things. In most cases, low working capital means the business ... Read Full Answer >>
  2. Do nonprofit organizations have working capital?

    Nonprofit organizations continuously face debate over how much money they bring in that is kept in reserve. These financial ... Read Full Answer >>
  3. Can a company's working capital turnover ratio be negative?

    A company's working capital turnover ratio can be negative when a company's current liabilities exceed its current assets. ... Read Full Answer >>
  4. Does working capital measure liquidity?

    Working capital is a commonly used metric, not only for a company’s liquidity but also for its operational efficiency and ... Read Full Answer >>
  5. How do I read and analyze an income statement?

    The income statement, also known as the profit and loss (P&L) statement, is the financial statement that depicts the ... Read Full Answer >>
  6. Can working capital be too high?

    A company's working capital ratio can be too high in the sense that an excessively high ratio is generally considered an ... Read Full Answer >>

You May Also Like

Trading Center