As any elementary school nerd or frat house pledge will tell you, there are few things in life that are more painful than having someone grab your shorts from behind and yank them as far up your backside as possible.In the world of YouTube pranks, it's called a "wedgie." In the stock market, we call it a short squeeze. And – like a wedgie – if you're on the wrong side of one, it hurts...
A short squeeze happens when a heavily shorted stock rockets higher overnight – usually as the result of a favorable news announcement or corporate press release. The gains are unusually large as traders rush to buy as much as possible and press the share price high enough to force short-sellers to capitulate, buy back their shares, and push the stock even higher.
In the long run, stocks with a large short interest – say, 30% of the outstanding float or more – run into trouble over time. The best short-sellers – like Jim Chanos (who famously shorted Enron before the company's demise) and David Einhorn (who made a fortune shorting Lehman Brothers) – perform extensive research... and they're right about their calls much more often than they're wrong.
But in the short term, stocks with a large short interest can see tremendous moves higher.
Here's a look at a few stocks that got squeezed yesterday...
Electric carmaker Tesla Motors (NASDAQ: TSLA) popped 24% higher yesterday on the heels of a stronger-than-expected earnings report. Nearly 50% of TSLA shares are sold short. The stock has doubled in the past five months...
Coffee company Green Mountain Coffee (NASDAQ: GMCR) also surged higher after reporting earnings yesterday. Thirty-eight percent of the stock is sold short. That helped propel a 28% gain yesterday...
Thirty-six percent of bookseller Barnes & Noble (NYSE: BKS) shares are sold short. Short-sellers suffered an "atomic wedgie" yesterday following reports that Microsoft would pay $1 billion for the company's Nook division. BKS shares spiked 24% on the news...
– Jeff Clark
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