The stock market has a dirty little secret this year.
The S&P 500 may still be floating less than 2% below all-time highs this April, but there's a very different sentiment story taking shape right now. In short, investors hate stocks. Beyond the anecdotal incessant top-calling in the broad market, that extends to the stats as well. The AAII U.S. Investor Sentiment Bullish Index has backslid 40% since the calendar flipped to 2017, suggesting that nearly 70% of investors don't have a bullish outlook on the market over the next six months.
Thing is, when sentiment gets really skewed against individual stocks, it creates an important buying opportunity.
Once again, the data bear that 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.
In other words, the largest massively shorted stocks are actually more likely to squeeze higher than to drop.
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 three 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.
Leading Wall Street's hate list is the country's number-four cellular carrier, Sprint Corp. (S) - Get SentinelOne, Inc. Class A Report. Sprint has been a major outperformer of late, rallying more than 30% in the last six months alone -- and haranguing short sellers all the way up. As I write, the firm's short-interest ratio sits at 10.3, implying that it would take more than two weeks of non-stop buying at current volume levels for short sellers to exit their bets against Sprint.
Sprint's 60 million customers (45 million direct customers, plus another 15 million reseller and affiliate accounts) mean that the firm pales in comparison to larger players Verizon (VZ) - Get Verizon Communications Inc. Reportand AT&T (T) - Get AT&T Inc. Report. But in some ways, the fact that Sprint isn't Verizon or AT&T is its biggest asset -- and it's able to pitch more aggressive marketing to try and court dissatisfied subscribers from the big carriers to jump ship. Critically, that strategy has actually been working lately, with positive net subscriber additions in five of the last six quarters. Because of Sprint's relative size, it's able to move the growth needle more easily than its saturated peers.
Ownership of a valuable wireless spectrum position and deep pockets in 81% owner and primary benefactor Softbank provide an extra advantage to Sprint beyond its raw subscriber numbers. Infrastructure remains the magic bullet that the bigger carriers can invest in -- Sprint lacks the scale to compete and be profitable at the same time. A merger, like the potential deal with T-Mobile US (TMUS) - Get T-Mobile US, Inc. Reportprime shareholder Deutsche Telekom reported in February, could change that.
More importantly, any news on a deal could be the catalyst for a short squeeze in April.
Sirius XM Holdings Inc.
Another hated stock with a subscription model is Sirius XM Holdings Inc. (SIRI) - Get Sirius XM Holdings, Inc. Report. Satellite radio operator Sirius XM is the largest radio company in the world by revenue, and it's been a momentum play in 2017. Year-to-date, shares of Sirius are up 15%, tripling the S&P over that exact same time frame.
Sirius XM operates a satellite radio network of commercial-free music, sports, news, comedy and talk content -- hundreds of channels in all. The firm counts more than 31 million subscribers to its service. Sirius XM also provides telematics data, and traffic and weather data for the marine and aviation markets, as well as a stake in SiriusXM Canada. Car sales have historically provided a valuable lead generator for SIRI: the company has deals with nearly every major automaker to bundle satellite radios and trial subscriptions with new vehicle purchases, resulting in a high take rate.
While slowing auto sales could stand in the way of growth in the next few quarters, an incredibly low churn rate means that Sirius is unlikely to lose ground even if subscriber growth slows materially.
Sirius' satellite infrastructure gives it an impossible-to-replicate scale vs. terrestrial radio networks. Listeners maintain the same audio signal on the same channels nationwide. Likewise, the fact that Sirius XM is able to spread programming costs across millions of listeners means it can afford major celebrities, like Howard Stern, which increases the economic moat it enjoys over alternatives.
As of this writing, more than 20% of Sirius XM's float is being held short, making it a prime candidate for a squeeze.
Interactive Brokers Group Inc.
Rounding out our list of potential squeezes is $14 billion investment brokerage Interactive Brokers Group Inc. (IBKR) - Get Interactive Brokers Group, Inc. Class A Report.
Interactive Brokers is the largest U.S. electronic broker, as measured by daily average revenue trades. In total, the firm counts more than 370,000 client accounts that weigh in at $5.9 billion in equity capital. As a rising tide lifts the broad market averages, it's also lifting the value of Interactive Brokers' client accounts, and driving higher revenue trading volumes. That's helped to fuel a 29% increase in daily average trades in the past three years, and a 60% increase in the number of client accounts at IBKR.
While the online brokerage business is highly commoditized, Interactive Brokers has carved out a moat as the lowest-cost mainstream broker on the market. That, in turn, has helped the firm attract much more active traders than most discount brokers, with professionals from hedge funds to prop trading firms accounting for nearly two-thirds of total client equity. That attractive positioning among the market's most active traders should be an important advantage as equity market trading returns to historically normal levels.
In the meantime, Interactive Brokers' short ratio has risen to 12.5, indicating almost three weeks of buying pressure would need to happen for shorts to get out of this trade. First-quarter earnings later this month could be a squeeze catalyst for shares.
At the time of publication, author had no positions in the stocks mentioned