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3 Promising "Short-Squeeze" Stocks

 September 01, 2011 10:58 AM

In recent weeks, the only investors to rack up profits have been the short-sellers, who have been riding the downward market to ai their bets on falling stocks. But as stock prices appear to have stabilized (at least for now), should these short-sellers start to think about covering their positions? If they do, then they could add buying pressure (since they buy back borrowed shares to cover their positions), creating an unexpected rally in some of the most heavily-shorted names.

In recent weeks, I've discussed the high short positions in GE (NYSE: GE) (Read "This Well-Known Stock Could be in Trouble" here.), Ford (NYSE: F), EMC (NYSE: EMC) and AMD (NYSE: AMD) (Read "4 Stocks that Could Profit from a Short Squeeze" here) .

Here are three other stocks that look ripe for a rebound, with possible short covering as icing on the cake. Keep in mind, all short-interest data is as of Aug. 15 -- which is the most recent set of data.

1. Charles Schwab Corp. (NYSE: SCHW)
Gain since Aug. 15: 0.5% 
Fall from 52-week high: 36%

It's very curious that short sellers hold more than 41 million shares of this financial services stock (which is up 25% from the prior two weeks). There's no reason to confuse Schwab with the big banks that may be hard-pressed to deal with the ongoing crisis in housing or the broader economy. The real knock against Schwab is its presently weak profits. This is because the firm has always made a decent return in its money-markets funds. But with the Federal Reserve's rates at rock-bottom levels right now, Schwab simply has no way to get any real spreads in the business.

Simply put, it's unclear which catalysts short sellers may be identifying for a further downward move for Schwab -- shares already sit near a six-year low, and currently trade at about $12. But if short sellers seem unlikely to make money on the downside, then what kind of upside might there be? Plenty -- if you've got a one to two-year time horizon. It's all a matter of when interest rates begin to rise: "We think rising interest rates are a near certainty over a longer time frame, with calculable effects on Charles Schwab's earnings.

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