3 Stocks Facing a Short Squeeze

Cecil is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

I scoured the countryside to find three stocks that are facing battle between insider trading and short sellers. Short selling is the selling of a stock that the seller doesn't own. When you short sell a stock, your broker will lend it to you. The stock will come from the brokerage's own inventory, from another one of the firm's customers, or from another brokerage firm. The shares are sold and the proceeds are credited to your account. Sooner or later, you must "close" the short by buying back the same number of shares and returning them to your broker. If the price drops, you can buy back the stock at the lower price and make a profit on the difference. Short sellers can seriously affect the value of a stock, and some companies become repeated targets of short sellers.

Aruba Networks

Aruba Networks (NASDAQ: ARUN) is a leading provider of next-generation network access solutions for the mobile enterprise. The company's Mobile Virtual Enterprise (MOVE) architecture unifies wired and wireless network infrastructures into one seamless access solution for corporate headquarters, mobile business professionals, remote workers and guests. This unified approach to access networks enables IT organizations and users to securely address the Bring Your Own Device (BYOD) phenomenon, dramatically improving productivity and lowering capital and operational costs.

Revenue for the company Q1 2013 of $144.5 million grew 21 percent from the $119.4 million reported in Q1 2012. GAAP net loss for Q1'13 was $0.8 million, or a loss of $0.01 per share, compared with GAAP net loss of $0.5 million, or $0.00 per share, in Q1'12. There is a strong demand for the company’s services thanks to the proliferation of mobile devices.

J.C Penney

J. C. Penney Company (NYSE: JCP) is a chain of American mid-range department stores based in Plano, Texas. The company operates 1,107 department stores in all 50 U.S. states and Puerto Rico, and previously operated a catalog business and several discount outlets. J.C. Penney’s stock price gained 30 cents Monday to close at $18.47 a share. It was the third consecutive day that its share price moved higher, but it’s still 48 percent lower year-to-date.

CEO Ron Johnson has come up with a novel idea to transform the company. The strategy is to convert Penney’s into a mall with about a 100 small branded stores. Each of these stores will be remodeled with some amount of the bill being covered by the brand owner. The company is currently strapped for cash, and won’t be engaging in as much promotion as it used to in the past. Funnily enough, this is one of the reasons why Penney’s couldn’t attract top of the line brands. The new concept, which is a brainchild of Ron Johnson is set to improve on this.

First Solar

First Solar (NASDAQ: FSLR) is one of the world’s premier providers of fully integrated solar solutions, creating value-driven renewable energy projects that represent the leading edge of utility-scale solar technology and innovation. The company recently benefitted from a US ruling against dumping from cheap Chinese companies.

First Solar bears finally started backing off First Solar in mid-August, likely contributing somewhat to the stock's steady push higher. However, the last time shares short dipped significantly in FSLR was in mid-February - that was the end of a short but strong rally that began at near four year lows in December 2011. During the last earnings conference call, FSLR answered a pipeline-related question by stating that the company has recognized revenue on 626MW of its 3GW pipeline. At FSLR's current price of $29.91, these EPS estimates give forward P/Es of 8.0 for 2013 and 12.2 for 2014. FSLR's current price-to-sales and price-to-book ratios are both under 1 - 0.91 and 0.77, respectively - so I prefer to think of FSLR as roughly fairly valued at current levels.

Conclusion

Short selling contributes substantially to volatility in stock prices. Each of these companies has a short float of more than 20% and a price of more than $5. If you do decide to open positions in any of these equities, be sure to set stops to protect your equity. These stocks could move up or down very quickly. 


ceciljohn2002 has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend First Solar. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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