Beat the Market With 5 Foreign Stocks Everyone Hates

BALTIMORE ( Stockpickr) - With all of the attention investors have fixed on big U.S. indexes right now, it's easy to forget about foreign stocks. But that would be a big mistake in 2013.

As the U.S. stock market has been heating up, so have a handful of attractive international markets. Right now, more than a couple of them even make the S&P 500's rally over the last six months look tepid.

>>5 Hated Earnings Stock Poised to Pop

But I'm not recommending that you jump in and buy the foreign names that are the hottest right now. Instead, I think it makes sense to buy the overseas stocks that everyone hates.

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.

>>5 Rocket Stocks to Buy This Week

Today, we'll replicate the most lucrative side of this strategy with a look at five big-name foreign 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.

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

If you liked this article you might like

American Express Now Supported by Android Pay in Canada

Nasdaq Swept Away From Records on Brutal Surprise Tech Selloff

S&P 500 and Nasdaq Fall, Pulled Lower by a Swift Tech Selloff

Stocks Rise With Banks Outperforming Ahead of Next Week's Focus on the Fed and Interest Rates

JP Morgan Could Crash, Hard