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These 5 Hated Stocks Could Pop When the S&P Drops

Stocks in this article: GRMNMONFASTVMWO

BALTIMORE (Stockpickr) -- There's a lot of hate bubbling up in the stock market this summer. We got our latest glimpse of that with yesterday's 0.97% drop in the S&P 500.

But that hate could actually be a good thing for your portfolio. All you have to do is load up on the individual names that other investors hate the most.

Read More: Warren Buffett's Top 10 Dividend Stocks

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 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.

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.

Read More: 8 Stocks George Soros Is Buying

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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Markets

DOW 18,053.71 +23.50 0.13%
S&P 500 2,088.77 +6.89 0.33%
NASDAQ 4,806.8590 +33.3870 0.70%