From SmartMoney..March 2, 1999
The Squeeze Is In
By Paul R. La Monica
SHORT SQUEEZE
ARE YOU a predator? Do you delight in the misfortune of others? Then we've got the
investment strategy for you. It's called the short squeeze, and here's how it works.
You know that short sellers sell borrowed shares in anticipation of a stock's decline.
Then, once the stock has dropped, they pocket a profit by repurchasing the shares at a
lower price. Well, in a short squeeze, the bulls turn the tables on the bears by buying
huge amounts of a stock targeted by short sellers. This drives up the price, forcing the
nervous shorts to cover their positions. This so-called short covering sends the stock up
even further. The bulls then sell, pocketing a profit, while the shorts go home licking their
wounds.
Now, we're not recommending that you buy heavily shorted stocks willy-nilly. But, if
you can find a stock with strong fundamentals and a large short position, you just might
get some added lift from a short squeeze.
We came up with a list of 18 heavily shorted stocks that probably shouldn't be. All have
low debt loads and are expected to post at least 15% earnings growth for the next few
quarters as well as the entire year. Nevertheless, investors have sold short at least 10%
of each company's outstanding shares, and short interest in each has been rising. One
finalist was Xylan (XYLN), which announced Tuesday it would be acquired at a 37%
premium by French telecom company Alcatel (ALA). (Now there's another way shorts
lose their shirts.)
Two stocks, Go2Net (GNET) and Snyder Communications (SNC), look like especially
strong squeeze candidates. Here's the skinny.
Go2Net
Short selling in a sector whose investors care little if anything about conventional notions
of value is a dangerous proposition. Do you know anyone who bought a yacht with the
profits they made shorting Amazon.com (AMZN), Yahoo! (YHOO) or any other
Internet wunderkinds? We don't think so.
Finding a frothy stock ripe for a fall is one thing, but betting against a prevailing trend
seems kind of foolish. That brings us to Go2Net. This Seattle-based company owns and
operates a network of Web sites including the stock chat-room site Silicon Investor,
search engine MetaCrawler and the e-commerce-comparison site WebMarket.
The stock went public in 1997 but did not really take off until earlier this year after
Pacific Crest Securities analyst Jeff Goverman initiated coverage with a Strong Buy on
Jan. 11 and set a 12-month target of 125 (presplit). That report sent the stock soaring,
and as a result, Goverman raised his target to 165 just two days later. The stock split 2
for 1 last week.
This dramatic rise brought the attention of the short sellers. Short interest surged 142%
in January and as of Feb. 8, 1.6 million shares were being held short. That's 12.6% of
total shares and 23.5% of the available float. The stock took a temporary hit, falling
from a split-adjusted 60 in early January to 44 on Feb. 10. Then it took off again. In the
last day and a half, Go2Net has risen from 58 1/2 at the open on Monday to about 69
as of midday Tuesday. Is this already a squeeze play? There has been no significant
news, though most major Internet stocks have gained in the last two days.
Go2Net is estimated to make a profit this year (which is unusual for an Internet
company). But clearly investors are not debating whether or not Go2Net's P/E of 493 is
too high. Instead, they've got their eyes on sales, which increased 131% in the first
quarter, and the company's growing traffic. According to Media Metrix, the Go2Net
network of sites had 5.3 million unique visitors in January, up from 4.6 million in
December. How high could Go2Net climb? Well, Goverman's newest target is a
split-adjusted 82 1/2. But, we already know that's a moving target.
Could this be the next big play? |
