Short Interest Triple Play

08/29/2003 12:00 am EST

Focus:

Bernie Schaeffer

Chairman and CEO, Schaeffer's Investment Research

Three of the latest buy recommendations from Bernie Schaeffer  have one thing in common--high short interest. This means that investors are betting heavily that the shares will fall. As a contrarian, Schaeffer views this pessimism as a short-term bullish factor. Here are three plays where Schaeffer goes against the crowd.

"We've noticed a healthy supply of pessimism on the shares of AMR Corp. (AMR NYSE), which bodes well from our contrarian point of view. There has been a sharp rally off the 8 level; in addition, the shares have experienced a bullish cross of their 10-day and 20-day moving averages. often a sign of continued strength. Meanwhile, short interest also remains near a historical high at 45 million shares. This results in a short-interest ratio of almost five days to cover, leaving plenty of potential buying strength out there to propel AMR to new heights. Our recommendation is to buy the January 2004 9 call.

"High-debt companies like General Motors (GM NYSE) should continue to lead the way during this market's advance, as the Fed uses all of its power to pump liquidity into the economy. The stock benefited from a bout of buying strength that has pushed it sharply higher. At the same time, short interest on this stock is near an all-time high at 44.8 million shares. This sets the stage for a massive covering rally on any continued strength in the stock. Wall Street also holds a lukewarm view of the security, as there are only four 'buys' among 13 analysts. Future upgrades could bode well. Buy the January 2004 35 call.

"Kmart Holding (KMRT NASDAQ) was created in May 2003 following the company's emergence from bankruptcy. The stock has surged through support-turned-resistance at the 25 level. Despite its recent show of strength, options players remain overwhelmingly pessimistic toward the security. Puts more than double calls in the front three months of options. What's more, short interest has skyrocketed to 6.8 million shares. This is more than seven times its average daily trading volume. This accumulation of shorted shares could provide fuel for a covering rally. This combination of investor skepticism against a strengthening technical backdrop has bullish implications. We recommend the December 20 call."

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