Profit From 5 Stocks Everyone Hates
BALTIMORE ( Stockpickr) -- It may sound crazy, but the stocks everyone hates could make you rich.
That's not just my opinion; the data bears it out as well. Going back over the last decade, buying heavily shorted large- and mid-cap stocks (the top two quartiles of all shortable stocks by market capitalization) would have beaten the S&P 500 by 9.28% each and every year. That's some material outperformance during a decade when decent returns were very hard to come by.
It's worth noting, though, that market cap matters a lot. Short sellers tend to be right about smaller names, with micro-caps delivering negative returns when the same strategy is used.
Today we'll replicate the most lucrative side of this strategy with a look at five big-name stocks that short sellers are piled into right now. These stocks could be prime candidates for a short squeeze in the final push of 2012.
In case you're not familiar with the term, a "short squeeze" is the buying frenzy that ensues when a heavily shorted stock starts to look attractive again to investors, causing share price to skyrocket. One of the best indicators of just how high a short-squeezed stock could go is the short interest ratio, which estimates the number of days it would take for short-sellers to cover their positions. The higher the short ratio, the higher the potential profits when the shorts get squeezed.
Naturally these plays aren't without their blemishes. There's a reason (economic or otherwise) that these stocks are being heavily shorted. But for investors looking for exposure to speculative plays with beefier risk/reward tradeoffs, these could be powerful upside plays for the coming year.
Here's a look at our list of large-cap short squeeze opportunities .
First up is GPS giant Garmin (GRMN) . Garmin is on short sellers' perennial hate list, with a short interest ratio of 18.45 -- that number indicates that it would take short sellers close to a month to cover their short positions in this stock. Much of that animosity comes from Garmin's bread and butter: Personal GPS devices for in-car navigation. While these units fuelled Garmin's growth in years past, they've become increasingly commoditized more recently, with margins shrinking as competitors take extremely similar products to market.
But short sellers have been wrong about Garmin's shrinking business to date -- and in fact, the personal GPS market actually grew quickly in the last quarter, much to the chagrin of shorts. At the end of the day, Garmin's big advantage in the personal GPS market is its presence in other niche markets for navigation equipment: Aviation, marine, and outdoors. Because Garmin is the league leader in aviation (where its $30,000-plus G1000 glass cockpit system is standard equipment on most small planes today), the firm is able to fuel R&D spending that trickles down to the simple devices that it sells to consumers.