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Investors hate stocks that scare them. They hate stocks that have burned them. They basically hate any stocks that they don't already love. But what most investors don't realize is that taking a second look at Wall Street's most-hated stocks could provide some much-needed love for your portfolio in 2013.
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 2013.
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 hated. 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
It may seem surprising that blue chip giant
Johnson & Johnson(JNJ - Get Report) makes the list of most-hated stocks. The $200 billion healthcare firm is a go-to dividend name for income investors, and it's sitting on around $4 billion in net cash after all of its debt is accounted for. Even so, Johnson & Johnson currently sports a short interest ratio of 12, which means that there are so many short sellers piled into this stock that it would take more than two weeks for bears to exit this stock.