NEW YORK ( Stockpickr) -- After moving steadily higher throughout the first quarter, the markets were roughly flat in April and have been sliding in May. Could they be gearing up for their next upward move? After all, earnings have been quite robust, and corporate profits continue to trend nicely higher.
If we do get further gains, then it could pay to follow a strategy that paid off handsomely in the first quarter: focusing on risky and often heavily shorted stocks. As investors started to focus on riskier stocks, short-sellers got spooked and scrambled to cover their bearish bets. By doing so, they unwittingly added buying pressure to these stocks.
>>5 Stocks Set to Soar on Bullish Earnings
Assuming that scenario plays out again, let's look at the current crop of heavily-shorted stocks, identifying
five that may be subject to a major short squeeze
With 148 million shares held by short-sellers,
(F - Get Report)
is the second-most-heavily-shorted stock on the market (behind
). These bearish investors are focusing on the dismal economic conditions in Europe. For every $5 that Ford made in the first quarter in North America, it lost $1 in the rest of the world.
Yet it's not clear that things are going to get any worse from here. Sure, the European economies could stumble further, but Ford is cutting a range of costs in that region (which accounts for 25% of sales) and is also rolling out a host of new vehicle this summer and fall. If European economies don't slump further, the net income drag from that region will likely diminish, allowing the profits from the remarkably profitable North American market to come into sharper focus.
Current EPS forecasts of $1.45 this year and $1.70 in 2013 could easily be surpassed in such an environment, causing short sellers to buy back many of those 148 million shares.
Ford, one of
Appaloosa Management's holdings
, also shows up on a recent list of
5 Beaten-Down Stocks to Invest in Now
Bank of America
The 142 million short position in mega-bank
Bank of America
(BAC - Get Report)
appears warranted -- at first blush. BofA has proven to be the most troubled major bank in the country, and current income statements continue to reflect past sins. In fact, there's little reason to expect significantly brightening results for at least a year or two.