Buy These 5 Hated Stocks to Beat the S&P

BALTIMORE ( Stockpickr) -- A healthy dose of hate could fuel your portfolio gains for 2013. Let me explain.

Investors still aren't sold on stocks in 2013. Despite the fact that the S&P 500 has rallied more than 14% in the last 12 months, investors are still understandably questioning the permanency of any upside in the big index. After all, the scary headlines continue to grab a lot of mindshare from the investing public right now. So while investors certainly don't love stocks right now, there are more than a few that they hate.

>>5 Earnings Stocks Poised to Pop

And that hate is rarely justified.

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 short shares (and bet on a decline in its share price) -- and not many willing to buy. But my research shows that that's historically been a pretty good gain indicator.

Going back over the last decade, buying 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.

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 strategy was used.

>>4 Breakout Buys for January -- and One Sell

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 2013.

In case you're not familiar with the term, a "short squeeze" is the buying frenzy that ensues when a heavily shorted stock starts to look attractive again to investors, causing share price to skyrocket. 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.

>>5 Rocket Stocks Worth Buying This Week

Naturally, these plays aren't without their blemishes -- there's a reason (economic or otherwise) that these stocks are hated. But for investors looking for exposure to a speculative play with a beefier risk/reward tradeoff, the data tells us that these could be powerful upside plays for the coming year.

Without further ado, here's a look at our list of large-cap short squeeze opportunities.

>>5 Stocks Setting Up to Break Out

Content on this page requires a newer version of Adobe Flash Player.

Get Adobe Flash player

First up is customer relationship software giant ( CRM). Salesforce is the incumbent in the enterprise CRM software, helping around 100,000 businesses interact with their own customer lists. The firm's critical role comes with some big benefits -- chief among them is the fact that its customers are extremely sticky and unlikely to move their massive data rolls onto competing offerings.

Still, shorts are betting against en masse right now. The firm sports a short interest ratio of 11.1.

>>2 Could Stocks to Buy for 2013

In a world where ROI is being scrutinized much more intently for business spending, Salesforce's clear-cut revenue generation is a big plus. Companies can make a pretty easy case for the extra revenue that the platform's sales tools bring in -- as well as the IT costs they save by using Salesforce on the cloud rather. Software-as-a-service is also a more lucrative model for software firms like CRM. Instead of selling a software license and then trying to convince customers to spend big bucks on the next iteration of the software, the cloud model lets CRM charge recurring fees while trickling feature improvements onto the platform.

Right now, investors are anxious that Salesfoce is trying to squeeze more cash out of a saturated market. But new add-on services and huge growth opportunities abroad should help to calm some of those concerns. A fat net cash position on CRM's balance sheet ensures that this company can withstand some economic hiccups in 2013. Earnings at the end of February could be a big catalyst for this stock.

Becton Dickinson

Content on this page requires a newer version of Adobe Flash Player.

Get Adobe Flash player

Chances are you've bought a product from Becton Dickinson ( BDX) before. You just might not know it.

Becton is one of the biggest medical device firms in the world, with a huge business stocking hospitals and doctors' offices with scalpels, syringes, and surgical instruments. That means that you may have paid for a Becton syringe for your last flu shot without realizing it. Becton Dickinson also makes complex high-margin medical equipment, including oncology and pathology diagnostic devices. The medical device business is lucrative, but its bread and butter is still the boring medical product unit.

Exposure to boring health care spending is actually a big benefit. While there's considerable competition in the medical device space, there's a lot less in Becton's main line. Only a couple of firms can compete with Becton's scale, technology and cost at that level.

Regardless of where you sit on the political spectrum, Obamacare is a big catalyst for firms like BDX. With more Americans getting access to healthcare, medical consumable volume is ensured strong growth.

Financially, Becton Dickinson is in solid shape with consistent double digit net profit margins and cash coverage that offsets around half of the firm's total debt. A 2.3% dividend yield rounds out the picture for this company.

Short sellers are active in BDX, spiking the firm's shares 10.8. That's a high enough level to warrant a short squeeze in the first quarter of 2013.


Content on this page requires a newer version of Adobe Flash Player.

Get Adobe Flash player

Cerner ( CERN) is another heavily shorted medical stock worth watching right now. The firm is focused on harnessing the tailwinds from the transition to digital medical records. Cerner's Millennium software platform is marketed to everyone from pharmacists to physicians as a holistic approach to patient management, from medical data to financial records.

A big tailwind for Cerner is the fact that the U.S. government has mandated that medical facilities switch to electronic records -- and it's chipping in billions of dollars of subsidies to make it happen. Cerner's software also helps streamline the administrative side of things for medical providers, in some cases shortening the lag from when services are performed to when practices get paid. That adds some extra incentive for professionals to install Millennium in their offices.

With those big incentives in place, it's no surprise that around 80% of Cerner's sales come from the U.S. But the firm also has some attractive growth opportunities abroad, even if they're a less central part of the firm's long-term strategy. Exceptionally high customer switching costs and a bigger pool of potential clients in the coming years should help keep Cerner's top line on its upward trajectory.

Meanwhile, a short interest ratio of 12.8 makes this stock a solid short squeeze candidate from here.

Pioneer Natural Resources

Content on this page requires a newer version of Adobe Flash Player.

Get Adobe Flash player

Investors are betting against large-cap oil and natural gas exploration and production company Pioneer Natural Resources ( PXD). The firm's short interest ratio of 13.4 indicates that it would take around three weeks of buying pressure for short sellers to cover their positions in the stock at current volume levels. With reserves standing at 1.1 billion barrels of oil equivalent, this stock should have more staying power than shorts are counting on.

Pioneer is an experienced E&P with some attractive positioning right now. The firm boasts a reserve mix that's skewed towards liquids, which means that more of what the firm pulls out of the ground falls on the more lucrative side of the spectrum. Even though oil and gas prices have languished for the last few months, they're consolidating on the higher end of their historic range, a fact that's kept Pioneer's net margins high. In an environment where more and more integrated oil and gas names are shedding their downstream assets, the fact that PXD is already a pure play E&P should be seen as a big plus.

Even though the oil business is capital intense, Pioneer is also in good financial shape, with a hefty cash reserve on hand and a manageable debt load on its balance sheet. Perhaps more importantly, the firm's relatively low overhead costs mean that PXD can afford to operate on a shoestring budget and wait out inevitably higher oil costs down the road. Once oil starts climbing, we'll see how long short sellers can hold out.

Stanley Black & Decker

Stanley Black & Decker ( SWK) has gone through some big changes in the past few years. The toolmaker weathered the Great Recession, an economic environment that punished companies with construction exposure worse than most. And it dramatically ballooned in size in 2010 when Stanley and Black & Decker merged to form the company as it stands today.

But short sellers aren't impressed right now. A short interest ratio of 11.9 means that it would take more than two weeks of buying for shorts to exit their stakes.

Even though SWK is best known for its retail tool line, the firm has been working hard to take a more industrial posture, selling off its hardware and home improvement business and acquiring an industrial fastener firm for $850 million. Long-term, that strategy makes a lot of sense since it divorces SWK from one of the more volatile business lines represented on its income statement, and gives it a chance to pare down its leverage at the same time.

As the North American construction and DIY market slowly warms back up, international growth is going to be a key growth avenue to target for SWK. Only around 15% of the firm's sales come from non-OECD countries, and growing demand for building equipment in the emerging markets makes them particularly attractive to SWK. Next week's earnings call could be a big catalyst for shorts to run from this stock.

To see this week's short squeezes in action, check out the of Large-Cap Short Squeezes portfolio on Stockpickr.

-- Written by Jonas Elmerraji in Baltimore.


Follow Stockpickr on Twitter and become a fan on Facebook.

At the time of publication, author had no positions in stocks mentioned.

Jonas Elmerraji, CMT, is a senior market analyst at Agora Financial in Baltimore and a contributor to
TheStreet . Before that, he managed a portfolio of stocks for an investment advisory returned 15% in 2008. He has been featured in Forbes , Investor's Business Daily , and on Jonas holds a degree in financial economics from UMBC and the Chartered Market Technician designation.

More from Investing

12 Stocks That Make Up the GLUM Index

12 Stocks That Make Up the GLUM Index

REPLAY: Jim Cramer on Tariff Worries, Oil, Alphabet and Centene

REPLAY: Jim Cramer on Tariff Worries, Oil, Alphabet and Centene

Worth a Stunning $6.6 Trillion, Tech Stocks Have Taken Over the Market

Worth a Stunning $6.6 Trillion, Tech Stocks Have Taken Over the Market

Video: Athens Stock Exchange CEO on What's Next for Greece's Debt Woes

Video: Athens Stock Exchange CEO on What's Next for Greece's Debt Woes

Here's Why Snap Shares Climbed Monday

Here's Why Snap Shares Climbed Monday