Investing 101: Short-Squeeze Ideas With Insider Buying

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Interested in rebound candidates? We are, which is why we created the list below of stocks with high short floats (short-squeeze candidates) and insider buying.

Our reasoning is this:

Short-selling is a strategy to cash in on a stock dropping in price: The short-seller borrows shares today, immediately sells them, and then buys them back at a future date (and hopefully at a lower price) to return them to the owner and keep the difference as profit. The number of shares shorted indicates how bullish or bearish those investors currently are on a company.

When a stock becomes highly shorted amid deep pessimism, it can reach a sort of tipping point referred to as a "short squeeze." There are so many shares currently shorted that any bump up in price triggers a cascade in which short-sellers have to cover their positions by buying back the stock, which causes the stock to rally even further.

One way to find short-squeeze candidates is simply by looking at a company's short float. The short float of a company is the percentage of shares in a short position (being short sold by short-sellers) as a percentage of the total amount of shares available on the market (share float). Short-sellers make money when the share price of a stock falls. Therefore, if the short float is high, short-sellers are really confident that the share price is going to fall.

Because investors frequently pay attention to the behavior of short-sellers, a high short float could make investors nervous about a stock, which might in turn cause the share price to fall (like a self-fulfilling prophecy). But as mentioned above, any increase in price could result in the opposite outcome.

For this screen, we consider a stock with a short float greater than 20% of the total share float.

Among those names, we wanted to find companies that have been experiencing insider buying over the past six months.

Many analysts follow insider buying trends because, after all, insiders know more about their companies than anyone else. Their investment activity is closely monitored and can tell us a lot about where they feel the business is heading.

Insider buying is represented as a percentage of the share float. Companies experiencing insider buying over the past six months provide an indicator that insiders think the stock is undervalued at current levels. Inversely, insider selling serves as a negative indicator.

Insiders think these stocks are good short squeeze candidates, do you agree? (Click here to access free, interactive tools to analyze these ideas.)

1. Diamond Foods (NAS: DMND) : Engages in processing, marketing, and distributing snack products, as well as culinary, in-shell, and ingredient nuts. Short float at 39.04%, which is equivalent to 29.59 days of average trading volume. Over the last six months, insiders were net buyers of 8,225 shares, which represents about 0.04% of the company's 20.11M share float.

2. ITT Educational Services (NYS: ESI) : Offers postsecondary-degree programs in the U.S. that provide diplomas as well as associate's, bachelor's, and master's degrees. Short float at 34.43%, which is equivalent to 11.13 days of average trading volume. Over the last six months, insiders were net buyers of 374,000 shares, which represents about 2.1% of the company's 17.79M share float.

3. Iridium Communications (NAS: IRDM) : Provides mobile voice and data communications services through satellites to businesses. Short float at 20.15%, which is equivalent to 19.42 days of average trading volume. Over the last six months, insiders were net buyers of 85,100 shares, which represents about 0.2% of the company's 43.35M share float.

4. MannKind (NAS: MNKD) : Focuses on the discovery, development, and commercialization of therapeutic products for diabetes and cancer. Short float at 30.96%, which is equivalent to 26.45 days of average trading volume. Over the last six months, insiders were net buyers of 3,478,136 shares, which represents about 4.39% of the company's 79.31M share float.

5. Overseas Shipholding Group (NYS: OSG) : Engages in the ocean transportation of crude oil and petroleum products. Short float at 33.81%, which is equivalent to 11.92 days of average trading volume. Over the last six months, insiders were net buyers of 73,682 shares, which represents about 0.29% of the company's 25.00M share float.

6. Collective Brands (NYS: PSS) : Engages in the wholesale and retail of footwear and related accessories worldwide. Short float at 33.94%, which is equivalent to 9.37 days of average trading volume. Over the last six months, insiders were net buyers of 20,139 shares, which represents about 0.04% of the company's 55.24M share float.

7. Rex Energy (NAS: REXX) : Operates as an independent oil and gas company in the Appalachian, Illinois, and Denver-Julesburg basins. Short float at 33.67%, which is equivalent to 12.48 days of average trading volume. Over the last six months, insiders were net buyers of 77,325 shares, which represents about 0.22% of the company's 35.04M share float.

8. Seattle Genetics (NAS: SGEN) : Focuses on the development and commercialization of monoclonal antibody-based therapies for the treatment of cancer and autoimmune diseases in the United States. Short float at 24.49%, which is equivalent to 11.85 days of average trading volume. Over the last six months, insiders were net buyers of 1,475,000 shares, which represents about 1.3% of the company's 113.13M share float.

9. Saks (NYS: SKS) : Operates fashion retail stores in the United States. Short float at 30.07%, which is equivalent to 10.09 days of average trading volume. Over the last six months, insiders were net buyers of 4,696,280 shares, which represents about 4.48% of the company's 104.89M share float.

Interactive Chart: Press Play to compare changes in analyst ratings over the last two years for the stocks mentioned above. Analyst ratings sourced from Zacks Investment Research.


 

At the time this article was published Kapitall's Becca Lipman and Eben Esterhuizen do not own any of the shares mentioned above. Data  from Yahoo! Finance.The Motley Fool owns shares of Iridium Communications. 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.

Copyright © 1995 - 2011 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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