Every firm on Wall St. has a list of stocks that need to be bought for one reason or another. We keep our readers abreast of those lists, because many of the large firms we have research coverage with provide excellent sell-side work. It is much harder to get big Wall St. firms to commit to a list of stocks that need to be sold short. Firms carefully mention in their research, “They intend to, or already do seek business with the names mentioned.” In a recent report, Merrill Lynch provided investors with a list of stocks that are solid short sale candidates.

When conducting their research, the Merrill Lynch analysts scanned their coverage universe and used specific criteria to pick short sale candidates.

1. Underperform rated stocks that were disproportionately owned by active portfolio managers. Stocks that could see heightened selling pressure on negative news.
2. Stocks with extremely concentrated ownership, where an extremely large portion of shares are held by a small subset of managers. These could see more selling pressure than those with more diversified ownership and thus diversified sell disciplines.

Here are the seven stocks that fit the bill for possible short sales.

J.C. Penney Co.Inc. (NYSE: JCP) is no surprise. CEO Ron Johnson has left the struggling retailer and turnaround efforts have been bleak at best. The Thomson/First Call estimate for the stock is $15.

Diamond Offshore Drilling Inc. (NYSE: DO) is a candidate to short. Despite deepwater drilling success, the stock is heavily owned by hedge funds that will sell at will on any negative news. The Wall St. consensus price target is $75.

DENTSPLY International Inc. (NASDAQ: XRAY) makes the Merrill Lynch list. This maker of dental products recently lost its CFO to a large medical devices firm. The consensus price target for the stock is $44.

Lockheed Martin Corp. (NYSE: LMT) fits the bill. While it is facing possible defense department budget cuts, the stock has had a huge run up of almost 50% in two years. The consensus target is $94.

Cintas Corp. (NASDAQ: CTAS) makes the list. Currently the stock is the ninth most shorted S&P 500 stock, and that does lower the odds for success somewhat. The consensus estimate for the stock is $46.50.

Sigma-Aldrich Corp. (NASDAQ: SIAL) is a short sale candidate. Having recently slipped below its critical 200 day moving average, the technicals seem to be weakening. The consensus price target is $77.

MetroPCS Communications Inc. (NYSE: PCS) finishes up the Merrill Lynch list. With a shareholder vote this Friday expected to reject the T-Mobile USA recapitalization, many believe a yes vote in priced in to the stock. The consensus price target for the stock is $11.50.

There is one note of interest. Most of the names on the Merrill Lynch list are trading at or close to their 52-week highs, which may imply that they are priced to perfection. Any miss on earnings, revenues or forward guidance may call for a trip to the short sale woodshed. Remember, when selling short any stock with a dividend, the short seller is responsible to pay that dividend coverage as well as the cost of borrowing the stock. As you can see, here is the latest short interest activity in our go-to list of high dividend stocks.

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