BALTIMORE ( Stockpickr) -- You should be buying the stocks that everyone hates right now. In fact, you should be buying the biggest, most hated stocks with both hands this summer.
Why? The research shows that it pays to be contrarian.
I've argued for a long time that it made sense to look at big, financially secure stocks with hefty short interest. After all, piles of shorts in a good name have a very big possibility of getting squeezed and driving share prices higher for the folks on the other side of the trade. But that's not just an opinion -- the data bear that strategy out as well.
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Taking a look at 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
by 9.28% each and every year. That's some material outperformance during a decade when decent returns were very hard to come by.
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 strategy 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.
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In case you're not familiar with the term, a "short squeeze" is the buying frenzy that ensues when a heavily shorted stock starts to look attractive again to investors, causing share price to skyrocket. 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.
Naturally, these plays aren't without their blemishes -- there's a reason (economic or otherwise) 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.
Without further ado, here's a look at our list of
large-cap short squeeze opportunities