Stockpickr) -- The stocks that everyone else hates could make you rich.
That sounds like an outlandish claim, I know. But as any
contrarian investor knows, when sentiment against the most heavily shorted stocks reaches extremes, it's often a good idea to bet against the crowd. And the crowd has been making big bets against a handful of stocks in 2012.
But there's more to it than just that. It's not just an opinion -- the data bear the 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.
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.
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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