Lattice Semiconductor: Strong Fundamentals, A High Short Interest Ratio, And A Buy Signal

Stocks with high short interest or high short interest ratios have been all over the news this week, thanks to the insane rallies from Gamestop (GME) and AMC Networks (AMCX). The crazy jumps in those two stocks have caused additional interest in almost all stocks with high short interest ratios. A number of stocks have rallied more than 20% simply because they have higher short interest than many stocks.

We have been using the short interest ratio as a contrarian indicator for over 20 years and know the power of a short squeeze. The difference between Gamestop and AMC Networks, and the stocks that we like are the fundamentals. Both of those companies have terrible fundamentals and rallying for one reason and only one reason.

For us, if you can find a stock with strong fundamentals that is in upward trend and has a high short interest ratio, now you have a high probability trade. That is exactly what you have in Lattice Semiconductor (LSCC).

Before we get to Lattice’s short interest info and the fundamentals, let’s look at what the short interest ratio is and why it matters. First, the short interest ratio is simply the number of shares sold short divided by the average daily trading volume. For instance, if there are 5 million shares sold short and the average daily trading volume if 1 million, the short interest ratio is 5.0.

The reason the ratio can be a useful trading tool is because it can cause rallies to accelerate greatly. Let’s look at an example. If a stock is trading at $50 and there are short sellers that have bet on the stock going down to $40 or $37.50 for a quick 20% to 25% gain, to close their short positions the short sellers have to buy the stock. If the stock goes up instead of going down, the short sellers may have a stop set at $55 or $60. If a stock is already rallying and now you have short sellers adding additional buying pressure, the rally can accelerate greatly.

With that being said, the Nasdaq website shows 5,283,152 shares of Lattice sold short as of December 31. The average daily trading volume is 589,498 and that gives us a short interest ratio of 8.96. If the stock rallies and the short sellers are forced to cover, it will take almost nine days of average trading volume for them to cover their positions.

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