Three Stocks Primed for a Short Squeeze: Yelp Inc (YELP), Zillow Inc (Z), Green Mountain Coffee Roasters Inc. (GMCR)

Page 1 of 2

A short squeeze is a market phenomenon where securities that are heavily shorted experience rapid and tremendous rallies in the wake of positive news. To see a short squeeze in action, look back a few weeks to Netflix’s last earnings report: Shares nearly doubled in the wake of earnings that exceeded Wall Street’s expectations. It wasn’t purely that the quarter was so tremendous; rather, so many shares had been sold short that Netflix bears were left scrambling to cover.

Short squeezes are notable in that they work on a positive feedback loop. One trader covers his short, which raises the price. This new, higher price is seen by a second trader who is short. The second trader is then prompted to cover, raising the price of the underlying security further still.

Depending on how many shares are sold short, this process can be powerful and propel shares of heavily shorted companies to vast heights — particularly if much of the covering is done involuntarily (margin calls).

Yelp Inc (NYSE:YELP)

Can short squeezes be predicted?

To some extent, short squeezes can be foreseen in advance: Any heavily shorted stock about to face significant news could feel the effects of a short squeeze. Traders who don’t mind a high degree of risk could purchase out-of-the-money (OTM) calls on these securities ahead of the news. OTM Netflix calls, for example, gained hundreds of percentage points the day after the company’s earnings report.

To be fair, however, stocks that are heavily shorted are frequently done so for particular reasons. Perhaps the company is trading at a mind bogglingly lofty valuation. Perhaps the business model is fundamentally broken, or the company is under legal scrutiny.

Whatever the case, these companies face real challenges. Should the news come in negatively — as the shorts anticipate — shares could take a massive leg down.

Green Mountain Coffee Roasters Inc. (NASDAQ:GMCR)’s short float is about 25%

Roughly 25% of the the single-serve coffee giant’s shares have been sold short. The most notable bear is hedge fund manager David Einhorn, who gave a presentation back in the fall of 2011 laying out his short thesis.

In a recent investor letter, Einhorn hinted that he remains short: He admitted that, unfortunately, he was burned by the short position in the fourth quarter of 2012 when shares of Green Mountain roughly doubled.

Green Mountain is set to report earnings on Wednesday. Analysts currently expect the company to post an earnings per share figure of $0.65 on revenue of $1.33 billion. Anything more than that, and shares could soar.

Yelp Inc (NYSE:YELP)’s short float is roughly 27%

Yelp has a host of challenges. To start with, the company is a recent Internet IPO, along with Groupon, Facebook and Pandora — companies that have all seen their share price collapse following their IPO.

Further, Yelp isn’t making money, in fact it’s losing it. Analysts expect the company to report that it lost $0.04 per share this quarter on revenue of $40.29 million.

Page 1 of 2

Biotech Insider Alert - $6 Stock To Hit $40

$200 Million Dollar Healthcare Hedge Fund's #1 Best Idea Right Now

The best healthcare hedge fund out there right now is one of the largest shareholders in this biotech stock. The fund returned more than 20% in each of the last 2 years with a virtually fully hedged portfolio, and it's sending out a BUY signal on this biotech stock. Get your FREE REPORT today (retail value of $300)

This is a FREE report from Insider Monkey. Credit Card is NOT required.
Comments
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months. Our beta is only 1.2 (don't click this link if beating the market isn't important to you).

Lists

The World’s Most Famous Circuses

Best Hair Stylists

Most Popular NASCAR Drivers

The Best Romance Movies of all Time

The Most Wanted Drug Lords

The Oldest Money Managers

The Greatest Directors in the World

Largest Animals in the World

World’s Most Expensive Desserts

Best Selling Comic Books of All Time

A-list Actors who Sabotaged Their Career

Rappers With a College Degree

The Best Jazz Albums of all Time

The Most Influential Jazz Musicians

The World’s Most Famous Photographers

The Best Oscar-Winning Songs

Most Influential Choreographers Ever

Most Expensive Department Stores in the World

The Most Expensive Stolen Paintings in the World

The World’s Most Expensive Teas

Top Oscar Record Holders

The Most Expensive Flowers in the World

Countries With a Booming Film Industry

Most Expensive Cupcakes in the World

Uncommon European Escapes

The Most Stolen Artists in History

Best Travel Destinations in Australia

World’s Most Expensive Musical Instruments

World’s Most Famous Animals

Most Expensive Cakes in the World

Most Expensive Kosher Champagne in the World

Most Expensive Kosher Wine in the World

The Most Surprisingly Dark Fairy Tales

Most Popular Travel Destinations in Asia

The 10 Most Expensive Dresses Ever Worn to the Oscars

World’s Most Visited Art Museums

Best Countries for Photographers to Work in

Best Paid Jobs in the Film Industry

The Most Renowned Recovered Paintings Ever

Child Stars That Turned out Just Fine

Books That Were Banned in the Past Century

World’s Richest Dancers

Best Remedies against Bad Breath

Foods That Improve Your Skin Texture

Best-Selling Children’s Books of all Time

Foods That Boost Your Libido

Best-Selling Books of all Time

The Most Expensive Academy Awards Jewelry in History

Most Expensive Japanese Restaurant In New York City

The Best B-Boy Movies

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 129% in 2.5 years!! Wondering How?

Download a complete edition of our newsletter for free!