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Which Stocks Most Vulnerable to Short Squeeze?

Identifying stocks with high short interest was in the best interest of investors, “Fast Money” pro Joe Terranova said Tuesday.

“It’s one of the reasons why I got into the Netflix trade last week, 18 percent short interest,” he said, specifying another trade out there: U.S. Steel, which is 23.7 percent short.

“When you think about what steel is in terms of the global economy, this one is going to set up,” he said. “This is a trade you want to follow.”

Terranova said his new book, “Buy High, Sell Higher,” discusses the metric in more depth.

Tim Seymour agreed on U.S. Steel.

“The short interest is undeniable,” he said, predicting that hot rolled steel prices in the U.S. were rebounding. “Auto sales are going to be record this year. And if you believe there’s any strength in the housing market, you really want to get out of the way.”

Trader Karen Finerman identified two stocks: The Children’s Place and Skechers.

Finerman isn’t an owner but said she didn’t like to see Skechers skip the retail-focused ICR conference in Miami this week.

“They have a big short interest at 17.4 percent,” she said. “The optimists think, ‘Oh, maybe because they’re in M&A discussions.’ The bears would think, ‘No, because they’re going to have crappy earnings.’”

“Fast Money” pro Dan Nathan also cautioned at only looking at short interest, especially in light of a stock’s volatility.

“Think about some of these new IPOs we saw last year — like Groupon, LinkedIn, that sort of thing — they have high short interest. It’s expensive to borrow. The spreads are really wide,” he said. “One real buyer can get a real short squeeze going in these things, so you have to be careful. You have to be cognizant of those things.”

Options trader Mike Khouw echoed the warning.

“I think you just have to bear in mind that what Dan said is really spot-on,” he said. “When you have this type of high short interest, things could make a big break for it, but that break could be in either direction.”


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Trader disclosure: On Jan. 10, 2012 , the following stocks and commodities mentioned or intended to be mentioned on CNBC’s "Fast Money" were owned by the "Fast Money" traders; Nathan is long AAPL Jan puts; Nathan is long BAC Jan puts; Nathan is long MS Jan puts; Nathan is long NFLX Jan calls; Nathan is long INTC Jan put spreads; Nathan is long MSFT puts; Terranova owns APC; Terranova owns OXY; Terranova owns XOM; Terranova owns VRTS; Terranova owns IBM; Terranova owns CSCO; Terranova owns AXP; Terranova owns SBUX; Terranova owns CSX; Terranova owns SWN; Terranova owns AXP; Finerman is short AAPL calls; Finerman owns BAC; Finerman owns JPM; Finerman is short IBM calls; Finerman is short MSFT calls

For Wendell Weeks
No disclosures

For Clay Siegall
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For Chris Verrone
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SKX
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GROUPON
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