The S&P 500 may be a measly 1.6% shy of making new all-time highs this week, but that hasn't changed one critical fact in April: Investors still hate stocks in 2016.
As I write, total U.S. market short interest is hovering at post-2008 highs. In other words, investors haven't hated stocks this much -- and made this large of a bet on a market decline -- since the depths of the financial crisis in October 2008. That's a pretty sobering stat.
But the bears shouldn't get too excited just yet. The thing is, all that hatred is setting the stage for a fresh round of short squeezes in some prominent names.
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 is perennial short target Deere (DE - Get Report) . Deere has actually been in rebound mode for much of 2016. With a dollar under pressure helping commodity prices, Deere's core customer are seeing their buying power get a boost. That's translated into a 7% upside move in Deere in the first three and a half months of the year, a rally that's been confounding short sellers. At the moment, Deere's short interest ratio of 10.43 means that it would take more than two weeks of buying pressure for short sellers to exit their bets against this stock at current volume levels.
Deere is one of the biggest agricultural, construction, turf and forestry equipment manufacturers in the world. Agricultural equipment is Deere's biggest business -- the firm owns about half of the North American market for ag equipment, for instance. That's been a less-than-stellar place to have exposure to, as the strength of the dollar has harangued the prices of just about every commodity out there in the last few years. But as soft commodity prices catch a bid again in 2016, Deere could see its own rout reverse course.
Like an automaker, Deere owns a captive finance arm, Deere Capital. That finance unit gives the firm the ability to 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.
Look for earnings at the end of May as a potential upside catalyst in this stock.
Household products stock Newell Brands (NWL - Get Report) is another company that investors hate right now. This $22 billion company has been a stock in transition in recent months, thanks to its huge purchase of peer Jarden, which officially closed on Monday. A lot of the short interest in Newell Brands was a result of merger arbitrage bets being made on the deal -- but the fact that many of those short positions are still active makes this stock a squeeze candidate this spring.
Newell owns a vast collection of household name brands, including Paper Mate, Sharpie, Rubbermaid, Coleman and Yankee Candle. That big exposure to consumer spending has actually been a good thing in 2016, and it's helped to propel this stock more than 30% since shares bottomed back in February. Newell's brand portfolio includes a large number of products that are category leaders, a fact that provides income statement diversification as well as margin protection. Over the coming quarters, as Newell and Jarden integrate their brands, expect to see margins tick higher as the company cuts the least-profitable brands and saves replicated costs.
At the moment, Newell Brands' short interest ratio sits at 10.4, indicating that more than two weeks of buying pressure would be needed for short sellers to completely get out of this stock. First-quarter earnings at the end of April could be a catalyst to drive a short squeeze in Newell.
Under Armour (UA - Get Report) was one of the best performers in the S&P 500 last year, rallying nearly 20% in 2015 at the same time that the big market was barely able to end the year at breakeven, and most S&P components ended lower than they started. Now investors are betting that 2016 is Under Armour's year to miss the mark, shoving this stock's short interest ratio to 11.05.
So far, they've been wrong. Under Armour is up almost 6% in 2016, performing about twice as well as the rest of the S&P.
Under Armour is the growth name in the highly competitive athletic apparel business. The firm sells everything from clothing to shoes to sunglasses through a network of 191 company-owned stores, an online channel, and thousands of other brick-and-mortar retailers. While incumbent brands have been struggling to find growth, Under Armour has been stealing market share from them in the very same categories that have historically been viewed as the hardest to break into.
Under Armour has also taken its valuable performance sports brand image and applied it to other lucrative niches. For instance, the firm's launch of golf and hunting lines in recent years gives it substantial growth potential in the quarters ahead. Under Armour is a lot of things, but it isn't cheap. That fact is likely what short sellers are hanging onto right now -- but this stock has frankly never been "cheap."
UA reports its first-quarter numbers tomorrow morning. Shares could get squeezed if shorts try to exit all at once.
With rising interest rates on the agenda from the Fed, it's not surprising that a big dividend-paying REIT like Realty Income (O - Get Report) is being targeted by short sellers -- but maybe it should be. Realty Income currently has a short interest ratio of 12.9, indicating that short sellers would need more than two-and-a-half weeks to buy enough shares of this stock to cover their current bets.
Realty Income is one of the biggest real estate investment trusts, better known as REITs, on the market today. The firm owns approximately 4,500 commercial properties, most of which are freestanding retail locations. And it leases those properties to tenants on a triple-net basis, which means that tenants are on the hook for the property taxes, insurance and maintenance costs at Realty Income's properties.
Realty Income's REIT status also means that the company is obligated to pay out the vast majority of its income in the form of dividend distributions. The result is consistent, dependable rent income that makes Realty Income more of a play on consistent dividend payouts than a play on real estate prices. The prospect that the Fed may be unable to hike interest rates as quickly as expected is breathing some new life into high-yield stocks like Realty Income, which currently pays a 3.78% yield annually.
Between a 22% price rally and another dollar or so in dividend checks year-to-date, short sellers are feeling the squeeze this year.
Last up on our list of potential short squeezes is Ball (BLL - Get Report) . Ball is actually on the list for a pretty innocuous reason: its pending merger with container company Rexam. As investors try to play the pending merger between the two companies, a side effect is that they're shorting shares of Ball. Critically, though, it doesn't matter why a stock is being heavily shorted; a short squeeze can happen in any stock that has hefty short interest.
And with a short ratio of 10.1, about one in every 10 shares of Ball are actually being held short right now. That makes this large-cap metal can manufacturer a short squeeze candidate.
Ball is the biggest maker of metal cans on the planet. Even if you're not familiar with the Ball name, there's a good chance you've come in contact with its products. Approximately three-quarters of net sales come from soda and beer cans. The balance is split between other household packaging products and aerospace components (a business built out of Ball's expertise in aluminum parts). The pending merger with U.K.-based Rexam would instantly give Ball substantially more exposure to international markets where Ball isn't currently as large as it could be.
Likewise, the merger gives Ball the opportunity to divest non-core pieces of the soon-to-be combined business, with approximately $4 billion in assets on the table so that Ball can comply with competition approvals needed to close the sale. At this point, the Rexam deal has been pending for 425 days -- and it's close to being done. A merger completion would be an important catalyst that would start spurring shorts to take their positions off, potentially triggering a squeeze in Ball. Stay tuned.