The S&P 500 is at a four-year high and the investors that continue to try and fight the current bull market are taking a beating. There are a large number of stocks that trade with high short positions, even as the market is at highs.
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The short interest ratio on a stock is the amount of trading days it would take for all the shorts to be covered with average volume. For example, a short interest ratio of 8 would suggest it will take eight trading days for all the short positions to be covered if that was the entire volume each day.
When stocks are trading near highs and breakout to new levels it often will trigger a short covering rally as the short sellers give up their bearish bet and cover the position. To cover the position the short sell must buy back the stock and thus creates a large wave of buying; the end result is a stock rally.
SEE: Short Interest: What It Tells Us
Four stocks generated by a scan that searches for potential short covering candidates are highlighted below:
Realty Income (NYSE:O) has a short interest ratio of 8.5 and recently hit a new all-time high.The company owns a portfolio of commercial retail properties throughout the U.S. The rebound in retail REITs and the 4.5% dividend yield on the stock only increases the odds of higher prices. The shorts are betting that the consumer spending will slow and retail-related REITs will be hard hit. So far, the bulls have gotten this one right.
Canadian telecom products and services company Telus (NYSE:TU) has a short interest ratio over 100, according to the numbers. This number is extraordinarily high, but with average volume of only 131,000 and 19.42 million shares shorted, it works out. The stock is within a few percentage points of an all-time high set in 2007; a breakout above that level could easily spur on a short covering rally. The price to watch is $62.46. The bonus for TU is the 4.3% dividend that the stock pays to investors. This would be considered a risky play due to the stock trading just below important resistance.
The Fresh Market (Nasdaq:TFM) is an operator of grocery stores and as of last month it operated 115 stores in 21 states. The short interest ratio is 13.3 and the stock that went public in late 2010 is trading within 1% of its all-time high. The stock does not pay a dividend and trades with a PEG ratio of 1.8, which is not attractive, nor is it a negative number. The trend has been solid for TFM and the grocery store sector and it appears that will continue even as the shorts try and fight it.
The Ultimate Software Group (Nasdaq:ULTI) is a software-as-a-service company that falls into the growingly popular cloud-computing sector. The stock has a short interest ratio of 13.0 and is within 2% of an all-time high.There is no dividend payout and the PEG ratio is a higher 2.85, however the momentum in ULTI and the cloud-computing sector as a whole make the stock an interesting play.
The Bottom Line
I would never suggest an investor purchase a stock based solely on the short interest ratio. The number is a tool to use in finding new ideas and can be used as a predictor to a potential short covering rally. Investors must respect what the company does as well as its other fundamentals and the chart when deciding on a potential purchase.
SEE: 5 Must-Have Metrics For Value Investors
At the time of writing, Matthew McCall did not own shares in any of the companies mentioned in this article.