5 Short-Squeeze Stocks Poised to Pop

BALTIMORE (Stockpickr) -- Buy and hold hasn't worked out very well in 2014. Since the calendar flipped to January, the big S&P 500 index has moved all of 1%. That's hardly the kind of breakneck pace that stocks kept up last year, and it's spurring short sellers in a big way.

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In fact, short interest for U.S. stocks moved up to the highest levels since 2009.

That means that big bets are in place that stocks are set to fall. But the S&P's essentially flat price action hasn't been a gift to short sellers either in 2014. In fact, it's actually been a much worse grind in many cases, considering the carrying costs involved in being short. So with short selling in U.S. stocks tipping the scales, it's the bulls that have the big opportunity here.

How big? 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.

That's some material outperformance during a decade when decent returns were very hard to come by. So, how do you cash in this month?

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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. And with the S&P 500 within grabbing distance of all-time highs, you can probably guess that there are lots of losing open short bets feeling the squeeze right now.

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.

It's worth noting, though, that market cap matters a lot. Short sellers tend to be right about smaller names, with micro-caps delivering negative returns when the same method was used.

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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.

Sysco

First up is food service supplier Sysco (SYY), a $21 billion name that weighs in as the largest commercial food distributor in North America. Even if you're not familiar with the Sysco name, there's a good chance you've eaten its offerings. That's because Sysco makes the food served at more than 400,000 restaurants, hotels and institutional dining facilities around the globe.

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And Sysco's only getting bigger. A planned $8.2 billion merger with US Foods would increase the combined firm's sales to more than $65 billion each year.

Food distribution is all about the tradeoff between cost and quality: too pricey, and restaurants can't afford to stock their kitchens; too low-quality, and restaurants lose with patrons. Sysco's size enables it to strike the balance very well with a more effective supply chain than smaller peers. By relying on a distributor like Sysco, restaurants get a one-stop vendor for their ingredients, and a resource for add-on services like menu analysis that can save costs.

Historically, SYY has focused on growth by acquisition (much like the U.S. Foods deal), and while that's resulted in some balance sheet leverage ($3 billion and change at last count), it's a debt level that's more than tenable given SYY's cash generation abilities. Short sellers aren't hearing any of it, though. At last count, Sysco's short interest ratio stood at 10.17, indicating that it would take more than two weeks of buying pressure for shorts to exit their bets at current volume levels.

M&T Bank

$15 billion regional bank M&T Bank (MTB) has been enjoying a good run since the start of February. In those last three months, shares of the firm have rallied 9.25%, providing much chagrin for short sellers this year. Considering the fact that the rest of the banking sector has only risen 3.2% over that stretch, M&T is pretty high up on the leaderboard.

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And shorts hate it. With a short interest ratio of 14.57, it would take close to three weeks of buying for shorts to cover their bets against MTB.

M&T bank may be a "regional" name, but it's a big one -- the firm's positioning in the Northeast and Mid-Atlantic makes it one of the 30 biggest banks in the U.S. All told, the firm's 750 branches reach from upstate New York to central Florida.

In a time when the sins of 2008 are still coming back to haunt the big four banks, the relatively cleaner slate of regional banks still looks attractive. By actually sticking to retail and commercial banking in the fat years leading up to the real estate crash, M&T had the stronger underwriting standards it needed to make it though the lean years. While a regulatory edict to improve risk management has got short sellers salivating, the opportunity is overblown, especially considering the wider margins and cheaper valuation that MTB sports relative to its "big four" peers.

Look for earnings on July 14 as a potential catalyst for a move higher.

Fastenal

There's no two ways about it: Short sellers hate Fastenal (FAST) right now.

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The $14 billion industrial distributor has sported a perennially high short interest ratio for the last five years, a stretch over which it's managed to return gains of 158% to investors. For comparison, that's 43% better than investors would have done by buying the S&P 500. So now, with a short-interest ratio of 10.26, Fastenal should continue to be a prime short squeeze candidate.

FAST is an industrial supply company with more than 2,400 retail locations spread across the country. Yes, industrial supply may be a bit on the boring side, but stair-step revenue growth and hefty double-digit net margins make it attractive to own. Fastenal owns a huge product catalog: it stocks more than 410,000 types of fasteners and more than 585,000 maintenance and repair products, an inventory that makes Fastenal a one-stop shop for its customers. Innovative distribution tools, like Fastenal vending machines at customers' shops and increased exposure to private label products, should help to drive growth in the years ahead.

Even though Fastenal is one of the biggest distributors, the $5 trillion market remains hugely fragmented still. That's a key factor in FAST's upside potential. Earnings on June 4 could help trigger yet another squeeze in this hated stock.

Campbell Soup

140-year-old Campbell Soup (CPB) owns a product lineup that goes beyond chicken noodle and clam chowder. The firm's brand portfolio included non-soup labels such as Pace, Prego, Swanson and Pepperidge Farm in addition to its namesake label. As CPB focuses on fattening its margins, investors should win out in the longer-term.

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Two years ago, input cost inflation was the story on everyone's mind in food stocks. With the Fed dumping money into the system by the fistful, the argument made sense. But it hasn't materialized (in fact, deflation continues to be the battle being waged). So, with an increased focus on cost, Campbell Soup has been able to muscle its net margins into the double digits as recently as last quarter.

Now the firm is tackling sluggish sales growth with innovation. Between new product and packaging ideas, CPB is planning on introducing a bevy of new items to grocery shelves in the next two years, a bold move in an industry that's otherwise relatively stagnant. Right now, CPB sports a hefty short interest ratio of 10.21.

Realty Income

Last up is Realty Income (O), a $10 billion real estate investment trust (REIT) that short sellers hate right now. With a short interest ratio of 10.9, it would take more than two weeks of buying for shorts to cover their bets against this commercial landlord. Realty Income's mature portfolio of 3,800 well located mostly single-tenant retail properties gives it some downside protection against economic hiccups.

And Realty Income has an even bigger weapon against short sellers in 2014: a 5% dividend yield.

While most investors think of REITs as a good way to get exposure to the real estate market, that's really only a very small part of the equation. In reality, REITs are a more direct bet on income. Between a REIT structure that mandates 90% of income is paid out as dividends to shareholders, and industry standard triple-net leases that pass through very predictable revenues to the firm, these trusts are really an income vehicle. Exposure to real estate markets is secondary.

And dividends are like kryptonite to short sellers. Even in a flat market, dividends and margin interest can eat away at short returns -- and prime the pump for a squeeze. Keep an eye out for earnings on July 24.

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 names 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 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