Buy These 5 Hated Stocks to Beat the S&P
BALTIMORE (Stockpickr) -- A healthy dose of hate could fuel your portfolio gains for 2013. Let me explain.
Investors still aren't sold on stocks in 2013. Despite the fact that the S&P 500 has rallied more than 14% in the last 12 months, investors are still understandably questioning the permanency of any upside in the big index. After all, the scary headlines continue to grab a lot of mindshare from the investing public right now. So while investors certainly don't love stocks right now, there are more than a few that they hate.
And that hate is rarely justified.
When I say that investors "hate" a stock, I'm talking about its short interest. A stock with a high level of shorting indicates that there are a lot of people willing to short shares (and bet on a decline in its share price) -- and not many willing to buy. But my research shows that that's historically been a pretty good gain indicator.
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 was 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 2013.
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.