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5 Heavily Shorted REITs That Could Pop

BALTIMORE (Stockpickr) -- Short-sellers are betting heavily against REITs -- and that's exactly why investors should be buying them right now. Since the floor fell out of the housing market back in 2008, investors have been fleeing real estate investment trusts (REITs) en masse. After all, REITs are the most direct way to get exposure to the troubled real estate market, right? Not exactly.

In reality, even though properties are the biggest chunk of any REIT's balance sheet, it's better to think of REITs as income-generation vehicles than a way to bet on housing prices. That's because, generally, REITs lease their properties with commercial lease agreements that limit renewal risks and don't leave the firms on the hook for unexpected maintenance costs or tax bills. That means that REITs tend to have predictable incomes that are obligated to be passed onto shareholders in the form of dividend payouts.

For income investors, REITs offer some of the most attractive yields right now.

>>5 Stocks to Buy for an End-of-Year Rally

That hasn't stopped short sellers from betting against REITs, but heavy-handed short selling is one of the best catalysts for a pop in a handful of well known REIT names: it's called a short squeeze. 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.

With that, here's a look at REITs with short-squeeze potential in 2012.

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