Beat the Market With 5 Foreign Stocks Everyone Hates

BALTIMORE (Stockpickr) - With all of the attention investors have fixed on big U.S. indexes right now, it's easy to forget about foreign stocks. But that would be a big mistake in 2013.

As the U.S. stock market has been heating up, so have a handful of attractive international markets. Right now, more than a couple of them even make the S&P 500's rally over the last six months look tepid.

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But I'm not recommending that you jump in and buy the foreign names that are the hottest right now. Instead, I think it makes sense to buy the overseas stocks that everyone hates.

When I say that investors "hate" a stock, I'm talking about its short interest. A stock with a high level of shorting indicates that there are a lot of people willing to short shares (and bet on a decline in its share price) -- and not many willing to buy. But my research shows that that's historically been a pretty good gain indicator.

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.

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Today, we'll replicate the most lucrative side of this strategy with a look at five big-name foreign 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.

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, the data tells us that 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.

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