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.