5 Short-Squeeze Stocks Ready to Pop

BALTIMORE ( Stockpickr) -- The stocks that everybody else hates could make you rich.

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Investors often forget that contrarian investors don't actually think that the masses are usually wrong. Instead, the masses are only wrong at turning points -- they're right during the biggest part of the move. So it's at those turning points where contrarians are able to swoop in and claim their profits.

Normally, that means that contrarian investing is a waiting game. You've got to wait for markets to become overbought or oversold before jumping in on the other side of the trade. But individual stocks can reach turning points far more frequently -- and when they do, profit opportunities aren't far off.

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All you have to do is hone in on the five biggest stocks that investors hate the most.

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 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 shorts who need to cover their losing bets. And with the rally we've been in of late, you can probably guess that there are lots of losing short bets.

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.

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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.

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 method was used.

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.

Discovery Communications

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If the market's had a great year in 2013, Discovery Communications ( DISCA) has managed to do one better. Shares of the $30 billion TV broadcaster have rallied almost 32% year-to-date, stomping the performance of the S&P 500 by a wide margin.

Still, investors hate this stock right now. With a short interest ratio of 10.7, it would take short sellers more than two weeks of buying at current volume levels to cover their positions.

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Discovery owns a handful of international cable TV channels, including the namesake Discovery Channel, TLC, Science Channel and Animal Planet, and positions in properties such as Oprah Winfrey's OWN Network, launched in 2011. Discovery's niche positioning gives it some big benefits -- the firm's channels focus on topics such as science, technology and history, and they're able to sell more targeted advertising as a result. That's helped push the firm's net margins far above those of more conventional network broadcasters.

Discovery's channels are only part of the story. Content is king in the broadcast business, and so Discovery's 100,000 hour video library provides the firm with an extremely valuable asset -- especially now that streaming video firms such as Amazon.com ( AMZN) and Netflix ( NFLX) are falling all over themselves to license content.

DISCA has some tailwinds at its back right now, and its hefty short interest gives it the potential to pop this summer.


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Salesforce.com ( CRM), on the other hand, has had a slightly less blockbuster year. The $27 billion customer relationship management software maker is only up around 7.3% since the calendar flipped over to January, strong performance for a normal year, but far less strong performance for a year when the S&P 500 is up close to 19%.

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But investors aren't just betting on underperformance from CRM. By and large, they're betting on a drop. Currently, the firm's short interest ratio weighs in at 13.04.

At its most simple, Salesforce makes software applications that help its 100,000 customers interact with their own customer lists, handling everything from sending newsletter to tracking sales. Because the firm's applications have a direct and measurable correlation with sales, switching costs are higher than most business apps. After all, customers are a lot less likely to stop paying for software when they can see exactly how much it's contributed to their top line.

Because CRM sells its software as a service hosted in "the cloud" rather than an application hosted on users' computers, it boasts an attractive subscription-based model. That model provides recurring revenues with limited effort in periods subsequent to picking up new customers -- and because integration with the Salesforce.com platform is deep, customers can't simply jump ship without investing heavily in new systems.

Even though CRM has prioritized reinvestment over profitability in the last few years, it generates enough cash to turn the ship around quickly if the capital markets so dictate.

Waste Management

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Investors think Waste Management ( WM) is a garbage stock right now. Why else would WM's short interest ratio hover around 12.6? Of course, Waste Management is in fact a garbage stock of sorts -- it is the largest waste management service provider in the country. The firm boasts more than 270 landfills and a massive fleet of trash collection vehicles that spans the U.S.

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When I think garbage firms, the first thing that comes to mind is dividends: WM and its peers historically have generous, recession-resistant dividend payouts. Currently, Waste Management's yield adds up to 3.36% annually. Don't forget, dividends are like kryptonite to short sellers.

WM's willingness to embrace innovation has big potential in the years ahead. Right now, the firm's portfolio includes 22 waste-to-energy plants that are designed to turn the waste that WM literally gets paid to collect into renewable energy that the firm gets paid for again. At this point, the firm's energy plants make up a very small part of its total business, but waste-to-energy projects and the recent acquisition of small oil service firms should look attractive to investors right now.

Earnings in two months look like the next big catalyst for a short squeeze in WM.

Campbell Soup

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Don't let Campbell Soup's ( CPB) household name fool you -- investors absolutely hate this stock. That hasn't exactly worked out so well in 2013: Year-to-date, shares of CPB have rallied more than 37%.

That means that short sellers have been getting shellacked all year even if Campbell's short interest still stands at more than 13 this summer. That glut of beaten-down short sellers makes CPB a stellar short squeeze candidate right now.

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Soup isn't Campbell's only business. The firm may be the largest soup maker the world, but it also owns food brands such as Pace, Swanson and Pepperidge Farm. The firm just announced a big move in selling its European soups, sauces and simple meals to private equity firm CVC Partners -- the deal should free up significant cash for CPB to return to shareholders without touching the U.S. segment that makes up more than 70% of sales.

While Campbell's 2013 rally has reduced its dividend yield right now, the firm's current 2.42% yield still qualifies as "high" in this extremely low interest rate environment. With earnings slated at the end of the month and the pricing details of the European deal with CVC yet to be announced, there's a lot of headline risk in being short Campbell right now. Watch out for a squeeze.

Green Mountain Coffee Roasters

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Pain is an important teacher; when a child touches a hot stove, he learns not to touch it again. With that in mind, short sellers in Green Mountain Coffee Roasters ( GMCR) appear to be slow learners. Despite seeing the stock double so far this year on an earlier short squeeze move, sellers have piled back into GMCR this summer, pushing the stocks short interest ratio back up to 11.4.

At current levels, it would take more than two weeks of buying for shorts to exit their bets.

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Green Mountain owns Keurig, the brand of beverage brewers that use self-contained K-Cups to make coffee, teas, and other drinks. While Keurig's "fad" status has certainly helped to convince short sellers that GMCR was due to drop, the fact remains that the firm has already done most of the hard work in getting Keurig machines accepted by consumers. With brewers essentially ubiquitous at this point, the firm is able to make money on its cash cow: the K-Cups.

K-Cups offer a sticky revenue stream for Green Mountain. Because they're proprietary, the firm can command premium pricing for them. Big new rivals, including competition from Starbucks ( SBUX) have fallen flat in stealing market from GMCR's Keurig -- and short sellers shouldn't expect a sudden change in consumer buying to take the wind out of this stock's sales.

To see these short squeezes in action, check out this week's 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 CNBC.com. Jonas holds a degree in financial economics from UMBC and the Chartered Market Technician designation.

Follow Jonas on Twitter @JonasElmerraji

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