Even if you haven't been keeping a close watch on the market lately, it doesn't take much of a sixth sense to figure out how investors are feeling right now. Investor anxiety is off the charts in 2016, and it shows.
According to the AAII's U.S. Sentiment Survey, individual investors are less optimistic now than they were back in the middle of 2008's selloff. And overall, short selling is the highest it's been since the 2008 financial crisis. Those are some pretty stark stats.
That overwhelmingly bearish sentiment is actually creating some important buying opportunities in the market's most hated stocks. Put simply, being short is a crowded trade right now -- some of the stocks that the herd hates the most are actually the ones that have the most upside potential in 2016.
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.
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.
For our purposes, 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.
Up first on the list is heavy equipment manufacturer Deere (DE) . It may seem like Deere has been a perennial underperformer in recent years; a strong dollar has wreaked havoc on soft commodity prices, pressuring Deere's core farm equipment market in the process. But after a long stretch of selling, Deere has actually started turning the corner in 2016.
While the broad market is down about 6% since the start of this year, Deere is one of the few large-cap names that are actually up since the calendar flipped to January.
That hasn't stopped the short selling in shares of Deere, however. With a short interest ratio of 12.16, it would take almost three weeks of buying pressure for short sellers to cover their bearish bets at current volume levels.
Deere is one of the biggest agricultural, construction, turf and forestry equipment manufacturers in the world. Ag is Deere's biggest business by far -- the firm commands more than half of the North American agriculture market, for example. Even if you've never been on a farm before, odds are you're familiar with the John Deere brand, and that reputation and high degree of customer stickiness give Deere the ability to command premium pricing for its equipment.
One of Deere's biggest weapons is its captive finance arm, Deere Capital. Like an automotive manufacturer, Deere can subsidize its finance costs in order to move more equipment. That's a valuable selling tool, and it should only become more useful in a rising rate environment. Deere has been under pressure from short sellers for a long time now; if those shorts start to get squeezed harder in March, this stock could see a big move higher as positions get covered.
Generic pharmaceutical giant Mylan (MYL) is another stock that's high on investors' hate list right now. Mylan currently sports a short interest ratio of 10.17 -- that implies more than two weeks of buying pressure would be needed for shorts to get out of the trade at current volume levels. As of this writing, about one in every eight shares of Mylan's float is being shorted.
Mylan is the fourth-largest generic drug maker, with a global portfolio of more than 900 products. In recent years, Mylan has been expanding beyond its generic wheelhouse, expanding into higher-margin branded drugs. Mylan has also spent considerable resources developing biosimilars, which fewer generic pharma firms are as well equipped to work on. That move into pricier pharmaceuticals should help push margins up in the quarters to come; meanwhile, Mylan has the scale to manufacture lower-end generics at higher levels of profitability than smaller peers can.
Historically, Mylan's growth strategy has been built around acquisitions. In spite of that, management has done a good job of keeping balance sheet leverage reasonable. Today, the firm has $7.3 billion in debt, offset by a $1.2 billion cash position. Investors sold shares off following earnings earlier this month, but the short trade is looking pretty crowded at this point. Any moderate upside catalyst could drive a short squeeze in this stock.
We're only seven weeks in 2016, but the year is already shaping up to be a strong performance for shares of $13 billion industrial supplier Fastenal (FAST) . Year-to-date, Fastenal has rallied more than 9% higher, besting the rest of the S&P 500 by a wide margin. That outperformance has been grinding on short sellers, but they're still entrenched in shares here -- Fastenal's short interest ratio currently sits at 11.35.
Fastenal is one of the biggest industrial supply firms in the country, with more than 2,400 retail locations and a massive catalog that includes more than 410,000 types of fasteners and 585,000 different maintenance and repair products. That huge inventory makes Fastenal a one-stop-shop for everything from tools to fire extinguishers to paper towels.
Maintenance, repair and operation equipment and supplies generally represent a tiny expense for industrial customers. That's why, in spite of a challenging environment for many of Fastenal's biggest customers right now, this firm continues to book sales growth. Likewise, the MRO business is hugely fragmented, and that fact gives Fastenal some big growth opportunities as it expands its footprint. The company believes that it's only reaching three-quarters of the addressable MRO market in the U.S. from a geographic standpoint.
The firm's next earnings update could spur a short squeeze in Fastenal, especially considering the rally that shares have already managed in 2016.
The past few years have been transformative for shares of AMC Networks (AMCX) . The firm has found huge successes with its award-winning original programming, and it's leveraged that success at its namesake channel to expand its reach through outlets like BBC America, IFC, and WE tv. Hit shows like Mad Men, the Walking Dead, Breaking Bad and Better Call Saul are making AMC must-see TV, and that is helping the firm secure bigger affiliate fees from cable providers.
It's an interesting time to be a content owner. With more consumers opting to "cut the cable" in favor of online streaming services, content owners like AMC are finding themselves with more ways to monetize their libraries than ever before, even through their valuations don't fully reflect that. AMC's recent big investments in cable networks overseas give the firm a valuable vehicle that it can use to leverage its U.S. content abroad.
The BBC America joint venture is a good example of AMC Networks' strategy. By pairing off with a creator of valuable, high quality content, AMC Networks is in a position to take advantage of BBC's deep content library in a much larger market. Shares started the year on a sour note, but AMC has been reversing higher in February. Look out for earnings tomorrow this week as a potential short squeeze catalyst.
Right now, AMC Networks' short interest ratio sits at 10.21.
Last up on our list of potential short squeezes is document management company Iron Mountain (IRM) . Iron Mountain is another hated stock that's been grinding short sellers in 2016. Since the start of the year, shares have climbed more than 8.3% higher, making it one of the few stocks that's actually working right now. That recent bullish momentum increases the odds that shorts get squeezed in 2016.
Still, shorts are holding strong for now. Iron Mountain's short interest ratio of 11.79 means that it would take more than two weeks for short sellers to exit their bets against this stock at current volume levels…
Iron Mountain is the biggest provider of physical document storage on the planet, providing secure records management to the vast majority of the Fortune 500. The firm's customers include healthcare providers, law firms, financial services companies, and government agencies in more than 30 countries. Now more than ever, companies are willing to pay a premium to safeguard customer data, as the stakes for letting sensitive records loose get higher. Iron Mountain's focus on physical printed material gives it a moat that's nearly impossible for a competitor to replicate -- and while digital documents are becoming more prevalent, physical copies of documents aren't going anywhere anytime soon.
For the digital side of the business, Iron Mountain has been building out its IT offerings. The firm should grab considerable business simply as a result of it being the single vendor for document storage -- its big competitive advantage in physical document management gives it an edge on the digital side. The firm's shift to become a real estate investment trust means that shares currently yield 6.6%, a fact that adds some extra risk for shorts right now. Dividends are like kryptonite to short sellers.
Iron Mountain is another stock that announces earnings numbers tomorrow. Keep an eye out for earnings as a potential squeeze catalyst.