Market Overview

Three Potential Short Squeezes

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Beaten-down stocks with heavy short interest and potentially positive catalysts have all the ingredients for a classic short squeeze.

A short squeeze occurs when short sellers are in a panic to get out of their positions. A stock with high short interest rapidly reverses on positive news or sentiment reversal. Traders holding short positions then want out - often all at the same time. This creates high demand to buy back the shares that shorts previously borrowed, driving the share price even higher.

Here are three stocks with short squeeze potential:

Green Dot Corporation (NYSE: GDOT) is a financial service company that provides prepaid credit cards. It has about 6.4 million shares sold short as of June 15. That accounts for about 32% of the company's float and has a high short interest ratio (the short interest divided by the average daily volume) of 14.

The company recently created exclusive relationships with Wal-Mart (NYSE: WMT) and Dollar Tree (NASDAQ: DLTR). As a result, Wal-Mart removed American Expresses' Bluebird Cards (a main competitor to Green Dot's cards) from its stores.

Shorts may have targeted the name on a variety of concerns. The company faces immense competition, and its exclusive deals with retailers could draw the ire of regulators.

Still, price-conscious consumers may do more shopping at Wal-Mart and Dollar Tree if the U.S. economy slows down. Also, Green Dot could see an increase in shopping with its prepaid credit cards. They are popular among consumers who want the convenience of a credit card, but may be unable to get an unsecured one - the kind issued to most consumers with good credit.

For the first quarter of 2012, GAAP basic and diluted earnings per common share were $0.40 and $0.39, compared with $0.30 and $0.29 for the first quarter of 2011.

Steve Streit, Green Dot's Chairman and Chief Executive Officer said, “We're off to a great start in 2012, posting solid top-and bottom-line organic growth rates. We are excited about the opportunities that exist in our sales pipeline and believe we are well-positioned for continued success.”

Since its IPO on January 28, 2011, Green Dot shares are down about 50%, but have risen 10% in the past month.

Chesapeake Energy (NYSE: CHK), a natural gas exploration and production company, has 90.8 million shares sold short as of June 15. The company has 14% of its float shorted and a short interest ratio of 3.

Chesapeake has seen its shares decline due on management concerns. Earlier in the year, CEO Aubrey McClendon was accused of using company assets for personal gain, causing investors to panic. Chesapeake has also been probed for trying to avoid a bidding war for public land in Michigan against Encana Corp. (NYSE: ECA).

Another concern is Chesapeake's high debt. Chesapeake plans to complete its “25/25” plan this year. It establishes a 25% increase in two-year production growth targets while targeting debt reduction of 25%.

In addition, Chesapeake has been hit by historically weak natural gas prices.

Yet in the last month, natural gas has traded up about 23%. Warmer weather may be driving more air conditioning usage by consumers and therefore more gas consumption at electric power plants.

One potentially positive catalyst is that activist shareholder Carl Icahn has taken a Chesapeake stake and is expected to help clean up the company.

Chesapeake Energy traded down about 1.5% on Monday, but is up about 9% in the last month.

Meredith Corporation (NYSE: MDP) is a media and marketing company that specializes in magazine publishing, television broadcasting, marketing, and video production in the United States. It has 11.9 million shares shorted as of June 15, or 33.4% of its shares a float. The company also has a high short interest ratio of 37.

During the second quarter of 2012, Meredith had earnings per share of $0.66 and beat analyst estimates. What was disappointing, however, is that revenue growth was a mere 2%, missing analyst expectations. That said, Meredith Chairman and CEO, Stephen M. Lacy, noted in May, "We are very pleased with the ongoing strong performance of our local television business, and encouraged by improving national media advertising trends as calendar 2012 progresses. We continue to accelerate the execution of digital and video initiatives across our businesses, including expanding our tablet offerings, introducing new mobile apps, and increasing original video programming."

Also, Meredith is a company that regularly boosts its dividend. On May 9, the company boosted its quarterly dividend by 50%, raising its dividend yield to 5%.

The company recently expanded its food brand by acquiring Allrecipes.com for $175 million. Allrecipes.com is the world's largest digital food brand.

Meredith traded down about 2% on Monday.

Posted-In: Earnings Long Ideas News Short Ideas Movers & Shakers Intraday Update Movers Trading Ideas Best of Benzinga

 

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