The correct answer is      (A.)  Travelzoo (TZOO)

To understand how a stock can rise over +1,000% due to short sellers, it might be helpful to review the basics of a short sale. Simply put, investors who are "long" expect a stock to rise over time, while those who are "short" predict that it will drop. To cash in on this decline, the process is rather simple:

1.)  Borrow shares from a broker, and sell them on the open market.
2.)  Wait for the share price to fall.
3.)  Buy the shares back at the lower price to return to the broker and close out the position.

If the stock price drops from, say, $30 per share to $20, then you pocket an easy $10 gain. Of course, if the stock moves up and you finally throw in the towel at $40 per share, then you will lose $10 per share.

But think of the big picture. If other short sellers like you decide to get out at the same time, then all those buy orders (remember, you must buy the stock back to close out the position) will push the shares even higher. At that point, any remaining short sellers will likely get nervous and decide to bail out as well, pushing the shares even higher. This process, which can quickly feed on itself, is known as a "short squeeze" -- and it can lead to huge gains for the stock in a short period of time.

That's precisely what happened to Travelzoo, a small online travel specialist, in 2004. Traders had a very bearish outlook for the company, and nearly all of the firm's available shares were sold short. However, within a few months the stock began moving, climbing from below $10 to a new record high of $15. As short sellers rushed to cover their short positions, the stock began to skyrocket. That, of course, attracted buying interest from the momentum-investing crowd, which only further accelerated the gains. When the dust finally settled, TZOO had rallied more than +1,000% to reach a peak of roughly $100 per share.

It takes strong nerves to climb into a company that everyone else is bearish on. And while situations like Travelzoo don't exactly happen every day, there is certainly no shortage of companies that confound the shorts and rise instead of fall. Even when a rapid short squeeze doesn't materialize, it can still be advantageous to invest in a quality company that is a target for short sellers. Why? Because at its core, investing is always a game of supply and demand. Shares that are sold short represent a massive block of pent-up future demand -- these shares will all be bought back eventually, it's just a matter of time. And for a small, thinly-traded company like Travelzoo, sometimes all it takes is a spark to ignite the powder keg.

Nathan Slaughter, editor of StreetAuthority's premium value investing newsletter Half-Priced Stocks, set out in search of viable short-squeeze candidates -- more "powder kegs" -- in a recent issue. Nathan evaluated the short interest, short interest ratios, fundamentals, and valuations of a multitude of stocks, and found nine exciting companies that could be the next to blow, thanks to a short squeeze. He also provided an in-depth analysis of two of his favorite candidates -- including one with a price appreciation potential of +32%. To see Nathan's list and to learn more about the Half-Priced Stocks newsletter, please visit this link.