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Monday, November 1, 2010

Why small cap shorts have been squeezed on certain plays $RITT $TORM $LIVE $SHZ

Short sellers have been getting squeezed on many low floaters lately. While many of these stocks do lack substance, I do not think you can call every one of them garbage unless you do some research first. In my experience, two top factors that can sustain a run and cause a squeeze are : #1 - EPS and growth that support valuation or #2 a hot sector theme that the company does or may participate in the future. If it is just #2 when the theme fades the stock will fade.

SHZ - Ran because of a seeking alpha article that said because they have fluorite they probably have rare earth minerals (hot theme). Well if a Chinese small cap had rare earth, believe me they would be putting out press releases everyday on it. Did not see the substance here nor the EPS so I expected this to drop eventually and it has. Did not have the EPS, growth, or realistic part of hot sector theme.

LIVE - I called this a week before it ran and then the day it ran when it was in the $6's. The day it ran I called it as a sympathy play on TZOO/Groupon/Local Internet advertising (hot theme) and the fact it has an extremely low float as well as cash per share was high. Expected it to go up but not all the way to $10-$13 where I got completely out. Great trade but it will take EPS, news or an acquisition to make this run again in my opinion. Did not have the substance to sustain beyond the low float run. An overload of shorts could always cause a squeeze where there is a catalyst but that catalyst would need to appear first. Did not have the EPS, growth and the theme faded after TZOO's earnings.

RITT - I originally called and played RITT on LIVE sympathy because of the low float. I was in under $2 and out in the $4's. I thought the move it made to $8 would happen the first day of the run. However, it continued to squeeze frustrated shorts. I believe that is because it was a hot Israeli tech play in the same group as RDCM which ran last year, and earnings are due, and supposedly a new product showed up on its website. It will take great EPS or hot product news to mitigate this eventually falling and I don't expect EPS to be all that great. Shorts will get relief if EPS is not all that and there is not a hot product to launch. Did not have the EPS, but was in a hot sector so it squeezed. If EPS is not good and there is no guidance for growth, it will eventually show that it does not deserve the hot sector theme. But if EPS or a hot new product is there it would be sustained because there would be created hope for EPS.

TORM - I called this stock in the $6's and it hit the $11's right away. I sold half but kept half because this is the one stock that has a reason to go higher. TORM did .43 EPS for the first six months of the year and management said the rest of the year would show growth year over year. So this company could be on pace for close to a $1 EPS run rate while competitor KRO has a P/E of near 20. Titanium dioxide is in great demand these days and TORM has a synthetic process to make a cheaper version to avoid the expensive white kind. There have been many articles out there about the demand for titanium dioxide. So you have EPS to support a move, a good story in a hot theme (minerals demand), and a low float. I would not short a stock with these characteristics. They have both characteristics. EPS and growth, with a hot sector theme.

Before you short, do the research , every small cap stock is not automatically garbage, although many can be.

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Welcome to, blog home of Superman. Purpose of this blog is for me to discuss my trades and stock ideas (As well as opinions and rants on stock market related issues). I will mention the date and price I enter. As far as exits, I always try to take half off when I have some profit and if I believe in the stock, let the rest run further. I always also use mental stop limits, at which time I would exit and minimize any losses. I do not like to give price targets unless I can support them by P/E in some way or by comparison to another stock. I just post stock trades and ideas that I believe will go higher (or lower for shorts) and the reason I believe that. Individuals should have their own strategies for managing profits and losses. My stock picks tend to NOT be daytrades at all and many take time to move. I am not an investment advisor and this blog should not be considered or followed as investment advice.