5 Hated Stocks That Could Be Ready for a Short Squeeze

BALTIMORE (Stockpickr) -- June isn't off to such a hot start for stocks. So far, the big S&P 500 index has shed 1.44% since the calendar flipped to June, which admittedly isn't a whole lot on an absolute basis. But relative to the mostly sideways year that stocks have had, it's actually a pretty big decline.

June's little correction means that about 61% of 2015's gains have already been erased this month. No, it's not exactly an auspicious stat -- and it's no surprise that, on average, investors don't feel fantastic about stocks right now. That's not the extent of it; investors downright hate a handful of the biggest stocks on the market.

The good news is that hate can be a pretty powerful market indicator when it reaches extremes -- because it's usually 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 to exit the trade.

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 weeks and months ahead.



AT&T

Up first is AT&T  (T), the $180 billion telecom giant. AT&T has more or less kept pace with the broad market in 2015, so you wouldn't know it, but short sellers are stacking up against this stock right now. AT&T's short interest ratio of 11.09 means that it would take more than two weeks of buying pressure for shorts to cover their bets.

AT&T is the second-largest wireless carrier in the U.S., providing service to approximately 100 million customers. The firm also still has a huge legacy business, providing service to another 25 million landlines, plus millions more internet and television subscribers. That reach is set to expand considerably once the long-awaited acquisition of DirecTV  (DTV) closes -- an event that the both firms hope to finalize by the end of this month.

The DirecTV deal should create some lucrative cross-selling opportunities at AT&T, justifying the $65 billion price tag on the deal. Those package deals lower customer acquisition costs and hike retention rates, boosting margins in the process. Truth be told, the huge short interest in AT&T right now probably has a lot more to do with investors trying to make a merger arbitrage play on the DirecTV merger than it does with investors hating AT&T outright. But it doesn't matter why a stock has high short interest – only that it does.

The upcoming deal closure with DirecTV could be an important catalyst that sparks a pop in AT&T as shorts cover.



Deere

Heavy equipment giant Deere  (DE) hasn't been a particularly good bet for short sellers so far in 2015. Since the calendar flipped to January, this $30 billion tractor and combine builder has seen shares move about 4.5% higher with dividends factored in. In some ways that's actually worse for shorts than if Deere just moved higher from the start -- at least the move would have been obvious. Instead, shorts have seen their returns ground into negative territory by a steady march of income and margin interest.

And Deere could have more abrupt upside in store this summer.

Deere is one of the world's biggest manufacturers of heavy farm, turf and construction equipment. Even if you've never stepped foot on a farmer's field or a commercial forestry project, chances are you know the John Deere name; the firm's household name reputation has a lot to do with its ability to command premium pricing. Deere owns about half of the North American ag market today, a lucrative business that accounts for about two-thirds of Deere's overall sales numbers.

One of Deere's most important business units is its captive finance arm. With near-zero interest rates making major capital expenditures (such as farm equipment) relatively cheap, Deere has been able to leverage a well-capitalized lending business to move machinery. Despite overtures from the Fed that cheap money is coming to an end, it hasn't happened yet. The threat could help Deere move more equipment this summer.

Right now, Deere's short interest ratio sits at 12.2.

Exelon 

2014 was a stellar year for utility holding company Exelon  (EXC). Shares of the $28 billion power and gas stock rallied more than 36% last year. 2015? Not so much.

Exelon is down 10% since the beginning of January, and short sellers have been piling in, pushing this stock's short interest ratio up to 12.09. That means that it would take more than two and a half weeks of buying pressure for shorts to get out. Put simply, being short Exelon looks like a crowded trade as we head into the summer months.

Exelon owns regulated utilities that provide power and gas to approximately 7.8 million customers spread across the Central and Eastern U.S. The firm also owns one of the largest nuclear generation portfolios on the planet, with 11 plants that provide about 34 gigawatts of generation capacity. That's about 20% of the total nuclear generation capacity in the U.S., making Exelon a good way to get exposure to one of the lowest-cost energy generation mediums available today.

Like AT&T, a big merger is one of the major components that's likely adding to short interest in Exelon. The firm's planned $12 billion acquisition of Pepco  (POM) is expected to close later in the year. Like other utility stocks, Exelon pays a big dividend: 3.75% annually at last count. Dividends are like kryptonite for short sellers, which means that once Exelon's momentum turns around, short sellers are going to be under pressure.

Paccar

Paccar  (PCAR) has been enjoying some major economic tailwinds in the half-dozen years since the crash of 2008. Paccar is one of the biggest commercial truck builders in the world, manufacturing vehicles under the Peterbilt, Kenworth and DAF names. Aging truck fleets, record-low interest rates, and tumbling fuel prices have created an environment that's propelled sales to new highs.

Paccar's truck brands are well known for quality, which is particularly important in trucking, where operators live and die by uptime stats. Likewise, the firm's huge dealer network -- some 2,000 locations strong -- provides a service advantage over competitors that lack the same geographic footprint for service centers.

From a financial standpoint, Paccar is in good shape, with about $2.8 billion in cash and investments offsetting a very tenable $8.2 billion debt load. Still, shorts have been piling into this commercial vehicle manufacturer in recent months. Right now, Paccar's short interest ratio sits at 11.02, implying just over two weeks of buying pressure would be needed at current volume levels for short sellers to unwind their positions.

Seagate Technology

Last up on our list of hated short squeeze candidates is computer storage company Seagate Technology  (STX). Seagate has been correcting hard in 2015, shedding about 20% year-to-date much to the contentment of short sellers. But Seagate's short side is looking crowded here too…

Seagate is one of the biggest manufacturers of computer hard drives. Last quarter alone, the firm shipped approximately 55 exabytes of storage capacity. And while conventional hard drives have been becoming more commoditized in recent years, huge data storage demands have helped to keep Seagate's business strong. Likewise, the firm has been boosting investments in higher-end solid-state drives in recent years, so much so that management aims to have SSD products contribute about 80% of sales by 2020.

Seagate's relationships with original equipment manufacturers is key. Right now, the firm sells approximately 70% of its products directly to those OEM customers, forgoing margin in exchange for dependable scale. That means, as Seagate increases its solid-state drive capacity, it's got a huge customer Rolodex to sell them into.

As I write, Seagate trades for just nine-times trailing earnings, a bargain-bin valuation compared to the frothy multiples found elsewhere in this market. Earnings next month could be just the catalyst that longs have been hoping for in this stock. For now, Seagate's short interest ratio sits at 11.27, enough to make it another large-cap short squeeze candidate this week.

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

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