BALTIMORE ( Stockpickr) -- The stocks that everybody else hates could make you rich.
Investors often forget that contrarian investors don't actually think that the masses are usually wrong. Instead, the masses are only wrong at turning points -- they're right during the biggest part of the move. So it's at those turning points where contrarians are able to swoop in and claim their profits.
Normally, that means that contrarian investing is a waiting game. You've got to wait for markets to become overbought or oversold before jumping in on the other side of the trade. But individual stocks can reach turning points far more frequently -- and when they do, profit opportunities aren't far off.>>5 Big Stocks to Trade Now All you have to do is hone in on the five biggest stocks that investors hate the most. 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. >>5 Rocket Stocks to Buy Before They Blast Off 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. 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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