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TheStreet Open House

5 Sin Stocks That Could Pop on a Short Squeeze

BALTIMORE ( Stockpickr) --Sin is in -- at least when it comes to investing.

Of course, I'm talking about "sin stocks," the stocks of companies that provide products or services deemed morally questionable by some. Alcohol, tobacco, defense and gambling stocks are popular examples of sin stocks -- and while most investors would probably like to lump plenty of other industries into the ethically challenged category (banking stocks, for one), the common thread is that they're discretionary products and services whose consumption isn't as dependent on the broad economy as consumption for their straight-laced peers.

The argument for that is pretty simple: When John Doe gets his hours cut at work, he's probably more likely to blow of some steam with a stiff drink. With recessionary headwinds still in most investors' recent memories, sin stocks have been a popular investment for their ability to withstand economic downside, even if the "recession proof" nature of sin stocks isn't quite as bulletproof as some believe.

That recession resistance can contribute to some significant opportunities when short sellers get squeezed.

  >>5 Big Stocks to Trade for Gains

A short squeeze is the buying frenzy that ensues when a heavily shorted stock starts to look attractive again to investors. As more and more of the short investors buy shares to cover their positions, share prices skyrocket.

Almost anything can trigger a short squeeze, including trumping earnings expectations, winning a lawsuit, unveiling a new product and even announcing a management change.

One of the best indicators of just how high a short-squeezed stock could go is the short-interest ratio, which divides shares short by average daily trading volume in order to get a ballpark estimate of 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 that these stocks are being heavily shorted. But for investors looking for exposure to a speculative play with a beefier risk/reward tradeoff, these could be powerful upside plays for the coming year.

The last time we looked at a list of sin stock short squeeze opportunities, our list rallied by an average of 18.65%, vs. a decline of 0.52% for the S&P 500 over that same period. This year, we'll attempt to do it again.

Here's a look at the short squeeze opportunities in five sin stock plays.

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