BALTIMORE (Stockpickr) -- If you want to beat the S&P 500 by double digits in 2014, just focus on the stocks that investors hate the most.
That may sound unintuitive, but hate can be a powerful emotion in the markets. It's powerful because, more often than not, it's wrong. When investors get heated about a stock and a trade gets crowded, there's a often money to be made on the other side of it. (That's one of the tenants of contrarian investing.)
Must Read: 3 Biotech Stocks Under $10 to Trade
But don't just take my word for it. The data backs it up too.
Over the last decade, buying the most hated and 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. So how do you cash in this month?
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. Too much hate can spur a short squeeze, a buying frenzy that's triggered by short sellers who need to cover their losing bets. And with the S&P 500 within grabbing distance of all-time highs, you can probably guess that there are lots of losing open short bets feeling the squeeze right now.
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.
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 the months ahead.