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

Its business — a sort of online yellow pages for restaurants and entertainment venues — faces growing threats from a host of competitors such as Google’s Zagat, or Facebook’s coming social graph search (shares of Yelp nose dived the day Facebook’s graph search was unveiled).

Still, with well over one quarter of shares sold short — about 27 percent — positive earnings (or even break-even) combined with decent guidance could have shorts running for the exits, and shares of Yelp soaring.

Yelp, like Green Mountain, is expected to report earnings Wednesday.

Zillow Inc (NASDAQ:Z) has the highest short float on this list, a whopping 36%

Like Yelp, Zillow is also a recent Internet IPO. To date, shares have had a bumpy ride, but are up over 7% since the company went public in the summer of 2011. In the last month, shares have gained more than 24%.

Zillow’s short float is notably higher than both Yelp’s and Green Mountain’s. More than one-third of Zillow’s shares have been sold short, about 36%. This makes it one of the most heavily shorted stocks on the Nasdaq.

Besides its status as a high-flying Internet IPO, shorts may be targeting the company due to its current valuation: Zillow trades at a P/E of 179.76 (based on Monday’s closing price of $36.82).

Zillow is set to report earnings next Wednesday, February 13. Analysts are currently expecting break-even earnings on $31.47 million worth of revenue.

Besides an upside earnings surprise, Zillow has also been linked to a number of takeover rumors, although nothing definitive has surfaced.

In the end, while short squeezes remain an unpredictable phenomenon, there are clues investors can look for to identify them in advance. Traders looking to take advantage of a short squeeze should keep their eyes peeled for stocks that are heavily shorted facing significant upcoming catalysts, such as earnings reports. Should these catalysts prove bullish, many of the short sellers could find themselves running to cover — in the process driving shares up to new highs.

The article Three Stocks Primed for a Short Squeeze originally appeared on Fool.com and is written by Salvatore “Sam” Mattera.

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