Despite new all-time highs in all the big stock market indices this December, investors hate stocks right now.
That's the only conclusion you can draw from total U.S. market short interest, which hit new post-2008 highs earlier this year, and has remained hovering at multi-year highs for most of 2016. In a nutshell, overall shorting in this market is currently at levels not seen since the financial crisis. And that could be a great thing for the stocks that everybody hates the most.
You see, it turns out that the big stocks that short-sellers hate the most also tend to hand investors the biggest returns.
That's not just my opinion -- 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.
Too much hate can spur a short squeeze, a buying frenzy that's triggered by short-sellers who need to cover their losing bets to exit the trade.
For our purposes, 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 four 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.
Industrial supplier W.W. Grainger (GWW) - Get Reportis one of a small number of large-cap stocks that consistently comes in with a double-digit short interest ratio: at the moment, it comes in at 10.6, signaling that it would take more than two weeks of nonstop buying at current volume levels for shorts to get out of this stock. The shorts haven't been happy this year - a 20% total return so far in 2016 has been working against them in a big way.
And there's reason to expect that momentum to hold up as Grainger tests new 52-week highs this week.
Grainger is one of the biggest names in the maintenance, repair and operating supply (MRO) business. The firm sells through a network of approximately 670 global store locations as well as catalogs, e-commerce, and vending machines located in customers' facilities. Grainger's product range is immense, with 1.5 million products stocks, ranging from toilet paper to safety cones to power drills to more than 3 million customers.
The firm may have scale, but the MRO industry remains extremely fragmented with Grainger only claiming around 6% of the total market. That leaves a lot of room to growth through winning market share and acquiring smaller players. Grainger has a long track record of returning value to shareholders through a dividend; in fact, management claims 44 years of consecutive dividend hikes. That payout acts like kryptonite for short sellers in the current environment. Keep an eye out for GWW's next potential stock catalyst when the firm reports its November sales next week.
$10 billion motorcycle maker Harley Davidson (HOG) - Get Reportis another big-cap that investors hate right now. Shares currently sport a short interest ratio of 10.2, with about one in seven shares in HOG's float currently held short. Of course, short-sellers have a lot more reason to hate this stock now than they did at the start of the year: with HOG's price up 33% in 2016, anybody who's shorted it is basically awash in red ink. That makes it an ideal short squeeze candidate.
Harley-Davidson doesn't need much in the way of an introduction. The firm is the largest manufacturer of heavyweight motorcycles in the world, and it owns a brand that's effectively without equal. While brand licensing and merchandise make up a relatively small share of H-D's total revenue, the strong brand loyalty among Harley riders that comes with those merchandise sales is significantly more valuable. That brand strength means that Harley can charge a premium for its bikes -- and it does.
H-D's demographic is shifting. The firm has been reaching out to new demographics like younger riders and minorities that haven't traditionally been core heavyweight motorcycle customers. Those customers now account for approximately one in three Harley-Davidson sales today, and a critical piece of the growth story. As long as Harley-Davidson keeps firing on all cylinders, short capitulation should continue to be a helpful source of buying pressure as we head into 2017.
Helmerich & Payne
Helmerich & Payne (HP) - Get Reportis a rebound story in 2016. This $9 billion oil and gas driller got shellacked in the last couple of years, selling off as energy prices plummeted and energy companies put new well starts on hold. But Helmerich & Payne's price trajectory has made an about-face this year, rallying more than 49% as commodity prices recovered. All the while, short sellers have been positioning themselves for a price move that already happened back in 2014.
H&P's short interest is immense right now - as I write, nearly one-in-four shares of this stock's float are being shorted. That means the rally we've seen year-to-date could be just the beginning if Helmerich & Payne gets squeezed.
Helmerich & Payne is a contract driller. That means the firm gets hired by energy producers to actually figure out how to pull commodities out of the ground. H&P's positioning is attractive - the firm has the largest fleet of land drilling rigs in the U.S., positioning that starts to look especially attractive as energy prices come alive and U.S. politics swerve back towards favorable terms for domestic production. H&P's FledRig platform is an asset that enables the firm to focus on more lucrative horizontal and unconventional drilling, earning it a fatter day-rate for drilling jobs than other peers.
Drillers have been trailing the rest of the sector in seeing financial performance match the price performance in the commodities themselves, but that should be changing as producers increasingly start to bring more projects online. Even a relatively modest decrease in rig demand should translate into higher share prices at Helmerich & Payne.
Alexandria Real Estate Equities
It sort of makes sense that short-sellers have been piling into shares of Alexandria Real Estate Equities (ARE) - Get Reportsince June. As a real estate investment trust, Alexandria is more or less a direct play on interest rates. You see, as a REIT, Alexandria is obligated to pay the vast majority of its profits directly to shareholders in the form of dividend payouts. The problem is that the potential pressure for higher interest rates in the months ahead means that high-yield assets become necessarily less attractive in the marketplace, weighing on share prices for assets like ARE.
Thing is, Alexandria isn't exactly following the rest of the industry lower. In the last six months, as short selling in ARE has basically increased eight times over, the average stock price in the REIT industry has dropped 3.3%. But Alexandria Real Estate Equities' share price has actually rallied 15% over that same timeframe, haranguing short sellers as ARE sits within a few points of hitting new all-time highs.
A lot of that performance has to do with Alexandria's positioning. This REIT owns a portfolio of urban office space, with a focus on science and technology campuses in major metro areas. Those campuses are a hard-to-replicate asset that comes with 97% occupancy rates. In total Alexandria owns 24.5 million square feet of leasable space in North America, with about one in four square feet currently still in development. That means that a material chunk of Alexandria's portfolio still has yet to come online in a real estate market that's just eclipsed its 2007 high water mark.
Currently, this stock has a short interest ratio of 12.8, indicating that it would take nearly three weeks of buying pressure at current volume levels for shorts to get out. That makes Alexandria a prime short squeeze candidate here. Look for earnings next month as a potential catalyst -- in the meantime, buyers currently control this stock's momentum.
At the time of publication, author had no positions in the stocks mentioned.