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TheStreet Open House

5 Heavily Shorted Stocks That Hedge Funds Love

Stocks in this article: HLFCHKSLCANILEJCP

DELAFIELD, Wis. ( Stockpickr) -- The aristocrats are active on Wall Street, and you should be paying close attention. The big players who run hedge fund are out disclosing their largest stakes through 13F filings. Market watchers are pouring over these filings to find out which sectors and stocks the big money is in love with. One of my favorite things to do when the new 13F filings come out is to look for which heavily shorted stocks that smart money is getting involved in.

>>5 Stocks Warren Buffett Is Buying in 2013

Heavily shorted stocks represent opportunity, because if the existing shorts are wrong, then the stock could set up for a monster short-squeeze that sends shares ripping higher. What better way to play a potential short-squeeze then to piggy back the smart money into some of Wall Street's most hated stocks. If the smart money sees opportunity in a heavily-shorted stock, then I will assume they have done extensive research and see something the bears do not.

A short-squeeze is a situation in which a lack of supply and an excess demand for a stock forces the price upward. Once a short-squeeze hits, the bears are typically forced to cover their positions as the price rises rapidly in order to protect themselves from big losses. If a stock starts to rip rapidly higher, then the trend may escalate quickly as the bears rush to get out. If enough short-sellers buy in their positions, then the price can push much higher than you would normally see during an orderly uptrend.

>>Hedge Fund Hate These 7 Stocks -- but Should You?

This is why I don't waste much time looking at the blue-chip stocks the Wall Street whales are buying during the 13F season. Instead, I look for the heavily shorted names since I know these stocks have added rocket fuel with their high short interest. All that these stocks need is some positive news and for a solid uptrend to develop. Once the squeeze begins, the gains can be truly breathtaking.

With that in mind, here's a look at several heavily shorted stocks that the smart money is buying here.

>>5 Stocks Under $10 Hedge Funds Love

One of the hottest hedge fund managers on Wall Street right now is legendary corporate raider Carl Icahn, who runs a $7 billion hedge fund, Icahn Partners. Icahn specializes in activist investing, and his personal net worth is estimated to be $17 billion.

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