The election cycle may finally be over, but it isn't the only place that's been negative this fall -- the stock market has been a hate-filled spectacle in 2016. Don't just take my word for it.
In 2016, Total U.S. Market Short Interest, a measure of how many bets are being made on a stock market decline, hit new multi-year highs, indicating that short sellers are piling in at a level not seen since the financial crisis in October 2008. That's a lot of hate for stocks at the same time that the broad market is only about 2% below all-time highs. There's a big disconnect there.
And that out-of-sync dislike for stocks could actually pave the way to big gains in the final stretch of the year. As it turns out, the big stocks that short sellers hate the most also tend to hand investors the biggest returns.
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.
But 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.
Retail giant Target (TGT) has been flirting with heavy short interest this year. Shares have peeked above a short interest ratio of 10 just three times in 2016, and we're seeing one of those times this fall. That level of shorting implies that it would take more than two weeks of buying pressure at current trading volumes for short sellers to get out of the Target trade. That makes Target a squeeze candidate this November.
Target tips the scales as one of the biggest big-box retailers in the country, with 1,792 locations spread from coast to coast. The firm's target market has historically been right in the middle of the middle market, a focus that's been squeezed in the last couple of years, as most growth has either moved toward luxury retail or to deep discounters. Despite the headwinds, Target still benefits from relatively unique retail positioning today with merchandising that gives it the ability to offer a unique selling proposition besides just being a one-stop shop. Target has long been at the top of the class in higher-margin private label sales -- approximately 20% of sales are Target's own private label products. That's a big advantage over its retail peers.
From a financial standpoint, Target looks attractive here. The firm has put cash to work in the most recent quarter, paying down its debt load. Currently, shares trade for about 13 times earnings, implying a modest discount relative to its other retail peers in a market where valuations remain frothy. Earnings on Nov. 16 could be a short-squeeze catalyst here.