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TheStreet Open House

Beat the S&P With 5 Stocks Wall Street Hates

Stock quotes in this article: EC, CRM, CHT, TMO, INFY

BALTIMORE ( Stockpickr) -- It may not feel like it right now, but by and large, investors still hate stocks.

The S&P 500's biggest one-week gain of the year last week? Investors hate it.

The 17.5% that the big index has managed to climb year to date? They hate that too.

>>5 Earnings Stocks Everyone Hates -- but You Should Love

The whopping 145% rally since the S&P bottomed back in March 2009? They hate that most of all.

The fact is that today, only 52% of U.S. adults are invested in the stock market, according to research done by Gallup. That's the lowest level recorded since the poll was first published in 1998. It's not just Main Street either. On average, Wall Street strategists are still extremely bearish in 2013.

But all of that hate can be harnessed for your advantage this summer. All you have to do is hone in on the five biggest stocks that investors hate the most.

>>5 Stocks Poised for Breakouts

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 bet on a decline in its share price -- and not many willing to buy. Too much hate can spur a short squeeze, a buying frenzy that's triggered by shorts who need to cover their losing bets. And with the rally we've been in of late, you can probably guess that there are lots of losing short bets.

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.

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.

>>5 Rocket Stocks Ready for Blastoff

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 method 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.

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