Given the dog days of summer, I thought it might be worth looking at a few companies which have potentially bullish chart set ups and high short interest ratios. The hope of this screen is to come up with a few potential short squeezes and stocks which have fuel to generate some profits. Here are three picks which caught my attention:
Idea one: Deckers Outdoor (DECK - Analyst Report), Zacks Rank #2 (Buy).
DECK is a footwear and apparel manufacturer and marketer.
Technically, DECK shows signs of forming a base and a clean rally over the $60 level could confirm a leg higher. The base pattern sets up the potential for a rally into the $90 area with $77 to $80 providing resistance along the way. As the stock formed the bottom in the $30 region, there was a flaring of volume which suggests a change of ownership. The recent rally has seen light volume. This is a bit concerning as it suggests limited interest, but may be consistent with the market pausing before the next leg higher.
The short interest in DECK has risen nicely through 2013. Since the middle of January 2013, the short interest ratio has risen from 5.68 to 14.15. The short interest ratio looks to be toward the higher end of the historical range. The short interest ratio built as the volume in the stock dropped off in recent months. There is an old saying in the trade, “never short a quiet market”. We’ll see if this saying comes true.
The fundamental backdrop for DECK appears constructive. Although there are worries about a slowdown in consumer spending given falling refinance activity and sluggish growth in disposable income, the labor market has been producing jobs and the bottom up story appears firm.
Analysts have tended to raise their profit outlook for DECK over the past 30 days. There were seven upward revisions and no downward revisions to the 2013 outlook. For 2014, there were five upward revisions and two downward revisions.
DECK is reasonably priced at 13.9x expected 12 month earnings per share. The median value is 14.9 and the min and max values are 5.6 and 27.5 respectively.
Idea two: Stewart Information Services (STC - Snapshot Report), Zacks Rank #3 (Hold).
STC provides real estate services which include global residential and commercial title insurance, escrow, and settlement services. Although there is an international footprint, it is small. About 6% of revenues in the June quarter were linked to international operations.
Technically, STC has been in a powerful uptrend and recently broke out of a triangle pattern to the upside. It looks to be continuing higher with its uptrend. The triangle argues for a move toward the $37, and traders may see the $30 level as support. The pattern would be in question on a breach of the $28 area.
The short interest ratio was 14.5 as of the middle of July and is up from 5.4 at the start of the year. The short interest ratio is on the upper end of the one year range and has swung higher since May. Given the run up in prices, some of these sellers may be under pressure to cover.
Fundamental dynamics for the company are mixed. The Zacks 2013 Consensus Earnings per Share Estimate has risen $0.18 over the past 30 days to $2.64, but the 2014 estimate has been cut $0.65 to $3.25. The expected growth rate is strong at 23%, but compressing. The recent rise in mortgage rates may be a headwind to the bull story.
Valuation is ok with the forward 12 month PE ratio at 10.4. Earnings have been volatile for the company. Free cash flow has been improving, but has tended to follow the direction of the economic cycle.
Idea three: Dynamics Materials Corporation (BOOM - Snapshot Report), Zacks Rank #3 (Hold).
BOOM operates in the explosion metal working space.
Technically, BOOM is has broken out of a falling wedge formation after forming a “V” looking base. The text book analysis argues for a move toward $28, but the top of the channel off the recent low could slow the rally. A retest of the wedge and the base around the $18 area could be seen as support.
The short interest ratio for BOOM is 10.2 and near the top end of the one year range. The ratio is also on the top side of the 10 year range. With signs of stronger manufacturing activity, this base could provide fuel for a rally. U.S. and European manufacturing PMIs have firmed and Chinese commodity imports found a firmer tone in July.
Fundamentally, analysts have been reducing their earnings estimates over the past 30 days. The 2013 Zacks Consensus Earnings per Share Estimate has declined $.07 to $0.75 and the 2014 EPS consensus has dropped $.01 to $1.32.
The 12 month forward PE ratio is 17.9 and under the 10 year median value of 19.2 and the price to sales ratio is 1.3 near the 10 year median.
Playing for a short squeeze is a contrarian trade and it is hard to match up a company with a strong earnings outlook with a short base. Shorts are usually looking for companies with weak earnings to sell - not strong earnings momentum. Given the Zacks Rank #2 for DECK, it may hold the greatest potential for price gain. It has the strongest trend in upward earnings revisions, a short base, and favorable chart set up. STC and BOOM are more neutral names in terms of earnings revisions, but are carrying favorable looking chart patterns and price gains seem to be squeezing shorts.