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BALTIMORE (Stockpickr) -- There's no two ways about it -- it stinks to be an income investor right now.
There are two pretty important metrics that measure just how well off income investors are: how much they're getting and how much they're losing. With rates being held down near historic lows, how much they're getting isn't much. But how much they're losing from inflation is.
That's creating a toxic environment for income-seekers right now, especially in assets that are perceived as "low risk" -- like treasuries.
There are some big alternatives, though. For income investors, stocks offer some attractive dividend yields (for major indices it's the highest in two decades, in fact). And some are predisposed to tack big capital gains on top of that. I know that's a big claim, but the data bears it out:
Going back over the last decade, buying 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.
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 strategy was used.
Today, we'll replicate the most lucrative side of this strategy with a look at five big-name stocks with high dividend yields that short sellers are piled into right now. These stocks could be prime candidates for a short squeeze in the final push of 2012.
In case you're not familiar with the term, a "short squeeze" is the buying frenzy that ensues when a heavily shorted stock starts to look attractive again to investors, causing share price to skyrocket. 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.
Naturally, these plays aren't without their blemishes -- there's a reason (economic or otherwise) that these stocks are being heavily shorted. But for investors looking for exposure to a speculative play with a beefier risk/reward tradeoff, these could be powerful upside plays for the coming year.
Without further ado, here's a look at our list of large-cap short squeeze opportunities.
Royal Bank of Canada
First up is Canada's largest bank, Royal Bank of Canada (RY). With more than 15 million clients in 51 countries and over CAD 800 billion, RY is also one of the biggest diversified banks in all of North America. And just try getting this kind of yield out of a major U.S. bank -- RY currently pays out a 4.18% dividend yield. That hasn't kept short sellers from piling into this stock, however. Currently, RY's short interest ratio comes in at 22, which indicates it would take more than a month of buying pressure for short sellers to cover their bets at current levels.
While Canada's financial system didn't see quite the same shakeout that we saw stateside following the recession, big banks in our neighbor to the North took plenty of cues to shore up their balance sheets and raise capital. More recently, that meant RY's exit from the U.S. banking market this year, a move a pocket of risk from its own balance sheet and use the proceeds to invest in more suitable units. Today, Royal Bank of Canada sports a relatively high quality loan book and net margins that are more comparable to a highly profitable regional bank than one of the big-three U.S. banks.
While rising debt-to-income numbers for Canadian consumers is something investors should be cognizant of, the numbers aren't scary enough yet to outweigh RY's positive attributes. This stock is a very good candidate for a near-term short squeeze…
Chunghwa Telecom Co.
Taiwan's biggest telecom company, Chunghwa Telecom Co. (CHT), has been posting disappointing performance in 2012, with shares down slightly on the year thanks to concerns that the breakneck growth in Taiwan's economy could be coming to an end. That's also spurred short sellers to pile into this stock, shoving CHT's short interest ratio up to 24.3. But while this firm is down, it's hardly out…
Chunghwa is the dominant telco in Taiwan, size that gives the firm a considerable advantage over rivals. Telecom firms of all sizes essentially have to pay for the same networks -- so while revenues are a product of scale, costs aren't. By being the biggest, CHT can spread its costs over more accounts. The firm has been upgrading its network over the last few years, speeding up its wireless infrastructure as well as the fixed line network that serves CHT's internet customers, factors that should help keep customer attrition low.
The downside of scale, of course, is growth. To counter a slowing top line, the firm has been pushing into new businesses, such as enterprise networking. That should help to maintain the growth numbers that sparked investors' interest in CHT to begin with. A huge 5.75% dividend payout gives this stock ample appeal to income investors to boot.
Short sellers really hate Thompson Reuters (TRI). The financial data firm currently sports a short interest ratio of 38.3, the highest on our list today. At that level, it would take close to two months for shorts to completely exit their positions at current volume levels -- that makes TRI a stellar short-squeeze candidate.
While Thomson Reuters may be best known for its news service, the firm's most significant business is actually its professional markets data platform, which licenses data to financial firms through pricey terminals. TRI is the number-two player in the terminal business, a lucrative niche that's dominated by the Bloomberg Terminal. Because investment professionals essentially commit to learning the proprietary commands of a system, they're less inclined to change once they've picked one. To counter growth challenges, TRI has been building out other professional analysis platforms, catering to quantitative investors with software packages that run upwards of five-figures a month.
Financially, TRI is in strong shape, with a manageable net debt load and plenty of balance sheet liquidity. The firm's 4.7% dividend yield should act as a reminder that the firm generates more than $1.5 billion in free cash each year. If we see an equity rally resume in Q4, Thompson Reuters could benefit disproportionately.
Plum Creek Timber
Plum Creek Timber (PCL) is turning out a strong year in 2012, up close to 15% while the broad market has only managed around 10%. Tack on the 4% dividend yield that Plum Creek pays out, and the outperformance grows substantially.
Plum Creek is a timber REIT that owns 6.6 million acres of timberland spread across 19 states. That makes the firm one of the biggest private landowners in the U.S., and the biggest timber REIT on the market today. But that doesn't mean that PCL's business is relegated to timber -- the firm has been courting recreational uses for its land holdings in an effort to extract more value from its land than logging. So far, that approach has been panning out.
REITs really only exist for one thing: income. Because of their tax-advantaged status, real estate investment trusts are able to pass through the vast majority of their incomes directly to shareholders and avoid taxes (PCL does pay taxes on some of its earnings that aren't covered under its REIT structure). That also means that a dividend shortfall is a big downside catalyst that short sellers have their eyes on. Shorts have pushed PCL's short interest ratio to 11.9, making this large landowner a solid candidate for a short squeeze.
With more than 3 million subscribers in Canada and the U.S., Calgary-based Shaw Communications (SJR) is a major provider of TV, internet, and phone services. Income investors take note -- not only does Shaw pay out a hefty 4.57% yield, it also pays it to investors on a monthly basis. But those big dividend checks haven't spared Shaw from heavy short selling pressure. Currently, the firm has a short-interest ratio of 32.3, which means it would take a month and a half of buying pressure for shorts to cover right now.
Shaw's foray into the mobile phone business is a big deal. The move makes Shaw more competitive with rivals that offer a bigger suite of services, and the firm was able to acquire wireless spectrum at a bargain price. That's not to say that the communications business isn't capital intense -- it is. But Shaw's existing infrastructure helped to greatly reduce the costs of building out a wireless carrier arm, and the payoff should be immediate, as customers pile into lucrative bundled deals.
Financially, Shaw is in good shape, after working hard to reduce its debt load shore up its finances. The fact that the Shaw family owns a substantial stake in the firm means that the firm's incentives are well lined up with those of shareholders. Shaw's Q1 earnings date on January 7 could be a big catalyst to squeeze the shorts.
To see this week's short squeezes in action, check out the of Large-Cap Short Squeezes portfolio on Stockpickr.
At the time of publication, author had no positions in stocks 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.