Stock Quotes in this Article: ACH, BXP, FAST, LMT, RY

 BALTIMORE (Stockpickr) -- When most investors think of short-sellers, visions often come to mind of traders betting against small, shaky companies. After all, smaller companies tend to be less financially mature, and with fewer eyes on them, they also tend to have greater levels of investor uncertainty.

But what happens when short sellers pile into the large-cap stocks?

In general, large-cap stocks (usually defined as those with a market capitalization of $10 billion or more) are the most well-established companies in an investor’s portfolio. They’re the ones with plenty of analyst coverage and the ones that often pay dividend income out to investors. But even blue-chips can become the target of short-sellers when faced with major economic headwinds, flawed financials or another catalyst that could send shares lower.

>>5 Stocks Set to Soar Off Bullish Earnings

That’s not necessarily a reason to flee. Heavy shorting in a large-cap stock can create a big short-squeeze opportunity for investors willing to look past the crowd.

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 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

As the largest bank in Canada, Royal Bank of Canada (RY) certainly meets the blue-chip criteria. The firm boasts more than CAD 750 billion in assets and serves more than 57 million clients worldwide. Still, that hasn’t spared the company from significant short-selling. At present, a short interest ratio of 15.7 means that it would take more than three weeks for shorts to cover their positions at current volume levels.

By and large, Canadian banks are in better financial shape than their major American peers. That’s thanks in large part to less extreme lending practices in our neighbor to the North. That doesn’t mean that Canadian banks have been immune -- large U.S. segments at most large Canadian banks as well as relatively low balance sheet capitalization (compared to a healthy U.S. regional bank, for instance) make the sector susceptible to economic headwinds.

But Royal Bank of Canada has been dealing with those challenges head-on. For starters, the bank unloaded its U.S. banking business last year, taking a major drag off of earnings. Canadian banking operations, which currently make up more than half of the firm’s business, continue to earn high returns for banks -- and that should translate into a better-capitalized balance sheet over the mid-term.

Meanwhile, a 4.13% dividend yield makes RY one of the highest-yielding financial names on the NYSE.

Royal Bank of Canada, one of TheStreet Ratings' top-rated diversified bank stocks, shows up on a recent list of 10 High-Quality Stocks for 2012.

Lockheed Martin

Lockheed Martin’s (LMT) reprieve from “heavily shorted” status didn’t last long. This defense contracting giant has been on short sellers’ radar for some time now, held lower as U.S. defense budget cuts pose a major risk to LMT’s revenues. Lockheed’s short ratio of 11.4 means that it would take more than two weeks of buying pressure for short sellers to cover their positions at current volume levels.

With the threat of a budget pullback, Lockheed has been pushing two big initiatives: IT services and international sales. Lockheed’s IT services arm is already the federal government’s biggest IT contractor, but the firm wants to court new agencies that aren’t related to defense spending.

At the same time, spreading its traditional defense business to our allies abroad is another way to escape potential budget cuts at home. To date, Congress has approved Lockheed’s international sales, but that added oversight creates potential risks to the firm.

Financially, Lockheed Martin is in good shape, with ample liquidity on its balance sheet and the wherewithal to maintain its hefty dividend. Politics are likely to keep shorts in Lockheed for the time being -- but a resolution of some of the more pressing federal budgetary issues could spur buying in this stock.

Lockheed, one of the top-yielding aerospace and defense stocks, shows up on a recent list of Top-Ranked High-Yield & High-Dividend-Growth Stocks.

Boston Properties

Large-cap office REIT Boston Properties (BXP) holds the keys to nearly 40 million square feet of rentable office space spread throughout some of the country’s strongest metropolitan areas. The high-demand nature of BXP’s portfolio greatly offsets some of the risks that the commercial real estate market is still throwing at investors, but even so, the firm’s short interest ratio weighs in at 12.1.

By and large, though, REITs’ exposure to real estate is indirect at best. Because these trusts lease commercial space through long-term, triple-net contracts, they’re essentially immune to the constant ebb and flow of the real estate market. Instead, it makes more sense to think of REITs as income-generation vehicles since they’re required to pay out the vast majority of their income to shareholders.

Boston Properties currently sports a 2.2% dividend yield, not high by REIT standards, but easily maintained given the firm’s current cash flows and pipeline of office buildings in development. Solid earnings on Feb. 1 could spur significant buying pressure for this stock.

I also featured Boston Properties recently in "7 Dividend Stocks Putting Cash in Investors' Stockings."

Fastenal

$13 billion industrial supplier Fastenal (FAST) had a phenomenal year in 2011; shares of the company rallied more than 50% in the trailing 12 months. That has made things tough for short-sellers, who’ve been active in this stock for several years now, pushing Fastenal’s short ratio to 10.1.

Fastenal’s size is its biggest advantage. The firm sells maintenance products and fasteners to industrial customers, boasting nearly 1 million products in its catalog and 2,500 locations worldwide. That scale gives the firm the ability to meet larger customers’ needs and the ability to provide smaller customers with better costs than rivals. As one of the biggest players in a highly fragmented industry, Fastenal has significant room for growth right now in the U.S. market.

From a balance sheet perspective, Fastenal is in excellent shape. The company carries nearly $140 million in cash and no debt whatsoever. That combination should provide ample liquidity for Fastenal’s operations and help to smooth out potentially bumpy operations in 2012.

Earnings on Jan. 18 are a potential short-squeeze catalyst to watch.

Fastenal, one of TheStreet Ratings' top-rated industrial distributor stocks, shows up on a recent list of 20 Winning Stocks Set to Post New Highs in 2012.

Aluminum Corporation of China

As China’s largest aluminum producer, aptly named Aluminum Corporation of China (ACH), better known as Chalco, has a direct line to one of the largest industrial metal consumers in the world. Because the firm is a completely vertically integrated producer, it boasts lower costs than many of its peers -- particularly at home, where an inadequate electrical grid has made input costs a major problem for margins.

To be sure, Chalco’s margins are well shy of those at established Western peers, but Chinese demand for aluminum and rising base metal prices could soon change that. Analysts expect this quarter to be particularly challenging for aluminum producers. Even so, those negative expectations are already priced into shares -- doing “less bad” could help to spur covering among shorts.

A short interest ratio of 15.2 suggests that it would take more than three weeks of buying at current levels for short sellers to cover their positions in ACH.

To see this week’s short squeezes in action, check out the Large Cap Short Squeezes portfolio on Stockpickr.

-- Written by Jonas Elmerraji in Baltimore.

RELATED LINKS:

>>10 Top S&P 500 Stocks for 2012

>>5 Big Stocks to Trade for Gains

>>3 Housing Stocks for a 2012 Rebound

Follow Stockpickr on Twitter and become a fan on Facebook.

At the time of publication, author had no positions in stocks mentioned.

Jonas Elmerraji, based out of Baltimore, is the editor and portfolio manager of the Rhino Stock Report, a free investment advisory that returned 15% in 2008. He is a contributor to numerous financial outlets, including Forbes and Investopedia, and has been featured in Investor's Business Daily, in Consumer's Digest and on MSNBC.com.