As the global equity markets struggled to churn out gains in 2011, the opportunities for short-sellers to cash in on the adversity were plentiful. Now as investors turn the page to a new year, there is likely to be a slew of additional opportunities as the markets remain in a volatile state. On the flip side, stocks that have already piqued the interest of short-sellers may present attractive buying opportunities given the potential for a short squeeze. Here are four heavily shorted stocks that could climb higher in the not-too-distant future.

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A Run on REITs
Short-sellers have homed in on anything and everything related to real estate since the credit crisis in 2008. Recently, they have taken aim at REITs. I believe a couple of these stocks that have been bet against may have the potential to send short-sellers scrambling for the exits in 2012. (For related reading, see How To Analyze Real Estate Investment Trusts.)

AvalonBay Communities (NYSE:AVB) has about 9.2 million shares short, which represents close to 12% of its float. After the company's Q3, AvalonBay did reduce its full-year FFO outlook and issue Q4 guidance below analysts' estimates, but it still remains on solid footing. The apartment REIT will post a 14.8% year-over-year increase in FFO for 2011 if it hits its revised mark.

Another REIT that has been drawing the attention of short-sellers is Boston Properties (NYSE:BXP). There are about 10.3 million shares short of BXP equating to 7.4% of its float. The company also announced Q4 and FY 2012 outlooks for its FFO that were below Wall Street estimates. However, Boston Properties has since increased its quarterly dividend by 10% and shares of BXP are now yielding 2.2%.

Bailing on Biotech
Two names in the biotech space that have been heavily shorted and have the potential to generate a short squeeze are United Therapeutics (Nasdaq:UTHR) and Cubist Pharmaceuticals (Nasdaq:CBST). There are approximately 9.7 million shares short of UTHR amounting to 22.8% of its float. For Cubist, there are about 10.1 million shares short or 27.6% of its float.

Shorts have been getting punished on UTHR as it has surged 13.4% over the course of the past month. The outlook for long investors got brighter on December 27,when France approved the use of United Therapeutics' treatment for pulmonary arterial hypertension. Another bullish indicator for the stock is recent insider buying activity by the company's CEO Martine Rothblatt.

Shares of Cubist continue to trade near a 52-week high as the company prepares to end the year on a couple of high notes. On December 13, Cubist announced the start of a phase 3 trial of a drug aimed at treating patients with intra-abdominal infections. Earlier in the month, the company completed its acquisition of Adolor Corporation, which will augment the Cubist drug portfolio. (Strategic acquisition is becoming a part of doing business. For more, see Key Players In Mergers And Acquisitions.)

The Bottom Line
Buying stocks that are heavily shorted can be risky business. The short activity can make for a rocky ride, but long investors can decrease their risk by buying into companies that have strong fundamentals or a favorable outlook for their business. Only time will tell as to how short-sellers will fare against these four stocks, but in the meantime, I believe it may be worthwhile for investors to begin to do their homework on taking a position on the other side of this trade.

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

At the time of writing, Billy Fisher did not own shares in any of the companies mentioned in this article.

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