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Krispy Kreme and Avis Among Leaders in Short-Interest Spikes

Top 25 list shows possible short-squeeze targets, growing pessimism

by 1/29/2013 2:12:05 PM
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Schaeffer's bi-weekly list of the 25 tickers with the biggest percentage increases in short selling turned up some interesting names. The largest mover was chemical maker PPG Industries, Inc. (NYSE:PPG - 139.95), which saw its short interest shoot up by 208% during the last two weeks, and now short interest makes up nearly 10% of the company's float. Other big movers included Delta Air Lines, Inc. (NYSE:DAL - 13.83), which saw short interest rise 64%, and steelmaker ArcelorMittal (ADR) (NYSE:MT -17.69) . Short interest is the measure of a company's shares that have been sold short, which is when an investor sells shares he/she has borrowed from a broker (in hopes of buying them back at a lower level in the future and pocketing the difference as profit). From our contrarian perspective, high short interest can be a good sentiment indicator of possible future buying demand.

Here's a more detailed description of short interest and why it's important, especially in the options game, along with Schaeffer's own tool to view a particular equity's level of short interest.

And below the chart is an in-depth look at three big movers who either are already popular in the options pits or have the big potential for a short-term rally. It should be noted that Schaeffer's Volatility Scorecard (SVS) readings for all three names is elevated, meaning options are reasonably priced at current levels, relative to the odds of a strong move in the shares.

Table of short-interest increases
  1. Krispy Kreme Doughnuts (NYSE:KKD - 13.01) saw short interest rise by 43% in the last reporting period, but the shorted shares only account for 4.1% of the company's float, and it would only take about one-and-a-half days to buy back the existing shorted shares at the stock's average daily volume. Still, the stock has been on a technical roll, up 38.7% so far in 2013 and outperforming the S&P 500 Index (SPX) by 64 percentage points in the last three months of trading. And KKD has further potential upside: it is currently trading at a 5.2% premium to the 12-month price target of $12.36 set by analysts -- so any price upgrades in advance or after the company releases earnings on March 18 could provide fuel for more upside. But from a contrarian point of view, the uptick in short interest could be an indication of growing pessimism, as short sellers may be betting the upward ride is over.


  2. Axiall Corp. (NYSE:AXLL - 52.35) could be this list's best bet for a short-squeeze rally. Formerly Georgia Chemical Corp. (which traded under the former ticker GCC), the chemical company was recently renamed Axiall Corp. following a merger with PPG's commodity chemicals subsidiary. This Atlanta-based concern had the highest total short interest as a percentage of its float on this list, at 36.1%. At the stock's current average daily volume, it would take investors three-and-a-half days to buy back all of the shorted shares. On the charts, AXLL has been on a major upswing, gaining 30.1% month-to-date, and more than doubling since hitting its 12-month low of $23.80 in late June. In addition, five analysts covering the stock still have it at "hold," with only two "strong buy" recommendations. Any continued increases could force the short sellers to exit, pushing the price even higher. Yet the new short traders could be also counting on a snag in the ongoing merger process.


  3. Rental car firm Avis Budget Group Inc. (NASDAQ:CAR - 22.00) saw short interest climb 43% during the latest reporting period, and short interest as part of the company's float now stands at 17.7%. The equity could also be a candidate for a short-squeeze rally, as it would take a full seven trading days to buy back all of the shorted shares. The company has seen its stock soar over the last six months as the economic recovery has stabilized. CAR shares are up 11% year to date, but more importantly, they have nearly doubled in price since hitting their 12-month low of $11.93 in April. Unlike the short-selling crowd, option traders have reacted bullishly to the upswing: CAR has a Schaeffer's put/call open interest ratio (SOIR) of 0.35, which is 11 percentage points from a 12-month low. In addition, the stock sports a 10-day International Securities Exchange (ISE)/Chicago Board Options Exchange (CBOE)/NASDAQ OMX PHLX (PHLX) call/put ratio of 9.23, meaning traders have bought to open more than nine times as many bullish calls as puts during the last two weeks. Should short sellers begin to venture over to the bullish camp as well, CAR could continue its march higher.
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