Take the recent move in Tesla Motors Inc (NASDAQ:TSLA). Shares have rallied nearly 90% in just the last month! While there’s been some good news to support that rally — a new leasing program, the paying back of government loans — the magnitude of the move was likely caused by Tesla Motors Inc (NASDAQ:TSLA)’s excessive short interest. Prior to the recent rally, nearly half of Tesla Motors Inc (NASDAQ:TSLA)’s shares had been sold short.
Admittedly it’s a dangerous game. Stocks that are heavily shorted, are shorted for a reason. But investors looking for the next Tesla-like move might consider magicJack VocalTec Ltd (NASDAQ:CALL), Coinstar, Inc. (NASDAQ:CSTR), and RadioShack Corporation (NYSE:RSH).
magicJack is facing fraud accusations
Most are probably familiar with magicJack VocalTec Ltd (NASDAQ:CALL) from the company’s frequent, yet fairly low quality, commercials. The company is focused on providing its magicJack VocalTec Ltd (NASDAQ:CALL) Internet-based home phone service, which is a cheap alternative to a land line phone.
In general, the company’s products get relatively poor reviews, and there’s the obvious secular trend away from home phones. But those factors are likely a small part as to why the company is being heavily shorted.
A blogger posting under the name Copperfield Research has accused magicJack VocalTec Ltd (NASDAQ:CALL) of fraud, claiming that the company has “wantonly misrepresented its financial results.” Even ignoring Copperfield’s posts, there is reason to be suspicious.
magicJack was formed out of a reverse-merger, a sketchy process that has produced such companies as RINO International and Sino-Forest. Moreover, the company has been engaging in a relatively bizarre process, selling put options on its own stock to generate income.
As of May 15, about 4.7 million shares had been sold short. As there are only about 18.6 million shares outstanding, magicJack has a short interest of over 25%. What’s more, magicJack VocalTec Ltd (NASDAQ:CALL) is a relatively small company, with a market cap of just under $300 million, which means that it could be prone to fairly significant swings.
Oppenheimer’s Tim Horan is the only major financial analyst covering magicJack VocalTec Ltd (NASDAQ:CALL). He’s liked the stock for months, and continues to give it an Outperform rating, though he did cut his price target in April.
Coinstar relies on RedBox
The majority of Coinstar, Inc. (NASDAQ:CSTR)’s profit comes from its RedBox movie rental subsidiary. A number of short sellers, such as Jim Chanos, believe that business is facing secular decline.
Although RedBox has benefitted from the bankruptcy of Blockbuster and other major movie rental stores, it is itself ultimately doomed, according to Chanos. Increasingly, consumers are turning to digital outlets to rent their movies — either over the Internet, or through their cable providers.
Coinstar, Inc. (NASDAQ:CSTR)’s management even appears to agree with this line of reasoning, to some extent. Coinstar, Inc. (NASDAQ:CSTR) has been investing heavily in other kiosk concepts, such as its Seattle’s Best Coffee “Ruby” kiosks. If these new machines cannot replace RedBox, Coinstar, Inc. (NASDAQ:CSTR)’s business is in trouble.
More than 40% of Coinstar’s outstanding shares have been sold short, but this is down in recent months, when short interest was over 50%.
If Coinstar, Inc. (NASDAQ:CSTR) can show that its coffee kiosks have a future, or the company can continue to post solid earnings, shorts may be encouraged to cover, leaving open the possibility of a squeeze.
RadioShack faces existential questions
RadioShack Corporation (NYSE:RSH)’s problem really comes down to questions of its survival. Is there a place in the market for its small electronics shops?
Evidently, many traders don’t think so, as short interest is about one-third of the company’s outstanding shares.
Obviously, Amazon.com, Inc. (NASDAQ:AMZN) has been taking away customers from the bricks and mortar electronics stores for years. RadioShack Corporation (NYSE:RSH)’s rival Best Buyhas an embraced a new strategy, but with its tiny stores, RadioShack Corporation (NYSE:RSH) can’t hope to copy it. Increasingly, RadioShack has shifted to selling mobile phones, but that’s a particularly crowded market.
Most analysts are bearish on RadioShack Corporation (NYSE:RSH), with Goldman Sachs downgrading the stock to Sell back in March. Goldman noted that RadioShack’s entire business model was “challenged.”
It’s hard to assemble a bullish case for RadioShack Corporation (NYSE:RSH), but perhaps that is why it is most poised for a short squeeze. A surprising earnings beat could propel shares of a company most have long given up on.
Playing the short squeeze
As I noted, playing a short squeeze can be dangerous. Stocks with high short interest often have fundamental flaws, and these three companies are no different.
Yet, short squeezes can offer big gains in a short period of time. Ideally, those interested in such a strategy might want to use out-of-the-money calls to limit their losses.
The article 3 Stocks That Could Benefit From a Short Squeeze originally appeared on Fool.com and is written by Salvatore “Sam” Mattera.
Joe Kurtz has no position in any stocks mentioned. The Motley Fool owns shares of RadioShack. Salvatore “Sam” is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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