) -- 2013's market climb has earned the moniker of the "most hated stock rally" -- and for good reason. Since stocks started their latest uptrend in November, sentiment has been pointed markedly away from U.S. stocks. But betting on the rally that everyone hated has paid off: the
is up more than 14% year-to-date.
That same approach works well with the market's most hated individual stocks right now too.
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That's not just my opinion -- the data bears it out. 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.
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 bet on a decline in its share price -- and not many willing to buy. 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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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 method 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.
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