While short positions are a smart way to hedge or bet against a falling stock, many times, the strategy can backfire for bears. As witnessed earlier with Yelp's (YELP) and Pandora's (P) single-day pop of over 20 percent are prime examples of how bears can get punished when positioned on the wrong side of a "short squeeze." Conversely, bulls looking to capitalize on the potential jump can also stand to benefit if played correctly.
Stocks with a high short float indicate that traders are betting heavily that the share price will continue to decline significantly, and perhaps even expecting the underlying company to go under. A short squeeze occurs when the stock price doesn't fall, but actually goes up. As short sellers try to cover their positions to avoid additional losses, the buying activity actually serves to push the prices higher, essentially creating a scenario where bears are panic buying.
Looking at the S&P 500, here are three names that could be potential candidates for a short squeeze play. It is important to remember that short squeeze targets typically are polarizing stocks in which investors and traders are betting heavily on price recovery or outright failure. These three companies each have short interest of over 20 percent, but have seen their share price increase significantly over the past month.
GameStop Corp. (GME)
By far, GameStop is the move heavily shorted stock on this list. Similar to Best Buy (BBY), the brick-and-mortar retailer was once a darling among investors. Those days are long gone now, however, as the company faces challenges of a rapidly evolving gaming industry that is increasing shifting to the online world. Nearly 60 percent of GameStop's outstanding shares are being shorted, but shares are up 30 percent over the past month. The stock does sport a hefty yield of almost 5 percent as well. Shares are currently trading around $20.
J. C. Penney Company, Inc. (JCP)
When CEO Ron Johnson took over the reigns at the major retailer, many investors expected the same type of turnaround that Apple (AAPL) experienced. That has yet to materialize as the company is still in the process of an identity makeover, and it's going less smoothly than investors had hoped for. With short interest over 41 percent, bears are indicating that they don't expect the transformation to happen any time soon. That said, the stock is still up almost 23 percent this month and yields a dividend of over 3 percent.
Lennar Corp. (LEN)
As a play on the housing market, Lennar Corp. has gotten a boost along with the space. The company is one of the largest homebuilders in the nation and has a market cap of almost $6.5 billion. Despite gaining 25 percent in the past quarter and over 10 percent this month, about 22 percent of the company's float is borrowed shares for short selling. Shares are currently trading around $34.
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