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Beat the S&P With 5 Stocks Everyone Else Hates

 

BALTIMORE (Stockpickr) -- There's a lot of hate bubbling over on Wall Street right now. According to Bloomberg data, U.S. total short interest is at the highest level it's been since the March 2009 market bottom. That means that, this summer, bets on a tumbling market are ramping up at a pace not seen since a major market extreme.

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And could be a very good thing for longs right now.

The fact of the matter is, hate is a powerful emotion to hone in on in the markets because, more often than not, it's wrong. Don't take my word for it; the data bear it out as well.

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.

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.

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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.

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.

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DOW 17,265.99 +109.14 0.64%
S&P 500 2,011.36 +9.79 0.49%
NASDAQ 4,593.4250 +31.2360 0.68%