Trade 5 Hated Names to Beat the Market

BALTIMORE (Stockpickr) -- If you want to beat the market consistently, you've got to be willing to look at the names that everyone else hates. That's not just an opinion -- the research bears it out too.

Going back over 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 S&P 500 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. These stocks could be prime candidates for a short squeeze in the last quarter of 2012.

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.

Johnson & Johnson

First up is $195 billion healthcare firm Johnson & Johnson (JNJ), a name that most investors wouldn't expect to see in short sellers' crosshairs. JNJ is the prototypical blue chip stock -- not only does this $180 billion healthcare firm boast a diversified business and enormous scale, it also enjoys a huge $17 billion cash position. Still, shorts have been betting against this firm for a while now. At last count, JNJ's short interest ratio weighed in at 13.9, indicating that it would take nearly three weeks of buying pressure at current volume levels for short sellers to close their bets.

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