5 Short-Squeeze Stocks Poised to Pop

 

BALTIMORE (Stockpickr) -- Buy and hold hasn't worked out very well in 2014. Since the calendar flipped to January, the big S&P 500 index has moved all of 1%. That's hardly the kind of breakneck pace that stocks kept up last year, and it's spurring short sellers in a big way.

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In fact, short interest for U.S. stocks moved up to the highest levels since 2009.

That means that big bets are in place that stocks are set to fall. But the S&P's essentially flat price action hasn't been a gift to short sellers either in 2014. In fact, it's actually been a much worse grind in many cases, considering the carrying costs involved in being short. So with short selling in U.S. stocks tipping the scales, it's the bulls that have the big opportunity here.

How big? 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.

That's some material outperformance during a decade when decent returns were very hard to come by. So, how do you cash in this month?

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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 short sellers who need to cover their losing bets. And with the S&P 500 within grabbing distance of all-time highs, you can probably guess that there are lots of losing open short bets feeling the squeeze right now.

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.

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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 the months ahead.

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