BALTIMORE (Stockpickr) -- Stocks are climbing a wall of worry in 2014. No, it may not feel like anxiety is getting dumped into the stock market this fall, but the data tell a different story.
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As U.S. markets press up into new all-time highs, U.S. total short interest is making highs of its own -- in fact, as I write, shorting in U.S. stocks is the highest it's been since September 2008. In other words, the last time investors were making such big bets against stocks was during the depths of the financial crisis.
Put simply, investors hate stocks right now.
That's a powerful nugget of information -- high levels of hate are useful because, more often than not, they're wrong. That's not just my opinion -- the data bear it 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.
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.
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 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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Up first is Sysco (SYY) . Sysco is the biggest food service distributor in North America, providing food and supplies to 425,000 restaurants, hotels and institutional dining facilities. So, even if you've never heard of the company, there's a good chance you've eaten the firm's products. Sysco plans on significantly expanding its scale by acquiring U.S. Foods in an $8.4 billion deal that's expected to close some time next year.
Sysco has a pretty straightforward value proposition for restaurants and other food service operators -- the firm is a one-stop shop for ingredients and supplies, as well as a resource for services like menu analysis. Because of the firm's huge scale, it's able to offer foods at much lower costs than kitchens can source on their own, and falling soft commodity and energy prices in 2014 should help boost the firm's margins for the coming quarters.
As I write, SYY's short interest ratio stands at 10.1, which means that it would take more than two weeks of buying pressure for short sellers to cover their bets against this stock. It's likely that much of the shorting in Sysco right now comes from its pending U.S. Foods acquisition. But ultimately, it doesn't matter what's causing the high short ratio -- any price jump is going to spur forced covering in shares.
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Fastenal (FAST) is one of those stocks that sees perennially high short-interest -- it's a name that investors seem to love to hate. Right now, FAST's short interest ratio stands at 16.56, which means that it would take more than three weeks of buying for shorts to cover their bets at current volume levels. That makes Fastenal a solid short squeeze candidate this fall.
Fastenal is an industrial supply company that operates 2,700 locations across the U.S. Fastenal provides its customers with everything from nuts and bolts to paper towels to tools, but that only scratches the surface. In total, the firm carries more than 410,000 types of fasteners and 585,000 maintenance and repair products in its catalog, which means that FAST is a single source for everything a customer may need. A huge catalog, wide geographic footprint, and now major technology advances -- like industrial vending machines located in customers' shops -- give Fastenal an edge over the competition.
That edge is critical in the industrial supply business. Despite Fastenal's scale as one of the largest firms in the industry, it estimates that it only takes home 2% of the industry's sales. In other words, there's a lot of room for growth before things start to get saturated. As long as Fastenal can offer easier supply chain management than its peers, it should continue to grab a bigger chunk of the overall industry.
Fourth quarter earnings in January could be the next potential catalyst for a short squeeze in FAST.
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Burger King Worldwide
2014 has been a blockbuster year for shares of Burger King Worldwide (BKW) -- shares of the $11.3 billion fast food chain have rallied more than 43% since January. And as shares hit new highs this fall, short sellers are betting on a drop. Right now, Burger King's short interest ratio weighs in at 10.88.
Burger King owns or franchises approximately 13,670 restaurants spread across 86 countries. And while that positioning makes Burger King considerably smaller than its biggest fast food peers, the firm's scale is set to increase significantly with the acquisition of Canada-based quick service restaurant chain Tim Hortons (THI) . The combined firm will boast a network of more than 18,000 total locations, most of them in North America.
Not surprisingly, most of the short interest in BKW is due to the pending Tim Hortons acquisition. Just like with Sysco, it doesn't matter what's driving BKW's short interest into the double-digits -- it only matters that shorting this stock is a crowded bet. And with markets pricing in a 92% probability that the deal will close without a hitch, those big short bets are going to need to be unwound in short order. That could create a short squeeze opportunity in the coming quarter.
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McCormick & Company
McCormick & Company (MKC) is the world's biggest spice, extract, and seasoning company, selling its food additives through retail grocery chains, food processing companies, and restaurants. The firm's brands include its namesake McCormick line, as well as Zatarain's, Lawry's, and Old Bay.
Right now, McCormick's stock has a short interest ratio of 11.9, implying that more than two weeks of buying pressure would be needed for short sellers to cover their bets.
McCormick owns the spice aisle at your local grocery store -- that's significant because those little containers of cinnamon and turmeric are expensive (and they come built-in with fat margins). As a result, the firm has been able to consistently book net margins in the low double-digits. McCormick's expertise gives it an economic moat; because industrial food companies often need to turn to the firm for help in developing new flavors, MKC has a Rolodex of sticky high-volume businesses.
International sales have quietly been gaining steam at McCormick. Today, the firm earns 40 cents out of every sales dollar overseas, a proportion that should continue to climb, especially as developing markets develop a taste for pre-mixed seasoning that earn bigger profit margins. The firm's next earnings call in January could provide a squeeze catalyst for this stock.
Last up on our list of hated stocks is data warehousing and analytics firm Teradata Corp. (TDC) . Teradata helps large companies store huge volumes of data, as that business has become increasingly commoditized, more of TDC's value proposition has come from its expertise in helping customers get actionable intelligence from those data stores. With more and more businesses seeing the need to implement "Big Data," TDC's complete package has a serious tailwind pushing the firm's revenues higher.
Teradata was one of the first movers in the enterprise data storage business, a big factor in the firm's big installed base today. Switching costs are high for companies that want to jump to another vendor, and that means that the firm's 1,200 existing customers are less likely to jump ship. As more companies begin leveraging the data they collect, TDC should be able to keep up its pace of new customer acquisitions without sacrificing margins.
Because most of TDC's sales force is direct, the firm is leaving money on the table in the small- and medium-sized business segments -- Teradata will need to move on those potential customers before a rival does. That said, a rising tide should continue to lift all data storage and analytics vendors in 2015 as customers throw more money than ever before at them. Meanwhile short bets are piled against this stock. As I write, short interest in Teradata tips the scales at 13.56. At current volume levels, it would take nearly three weeks of buying pressure for shorts to exit those bets.
To see these short squeezes in action, check out this week’s Short Squeezes portfolio on Stockpickr.
-- Written by Jonas Elmerraji in Baltimore.
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At the time of publication, author had no positions in the 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 that 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