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.

Investopedia Markets: Explore the best one-stop source for financial news, quotes and insights.

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.

Related Articles
  1. Term

    Understanding Short Covering

    Short covering is buying back borrowed securities to close an open short position.
  2. Stock Analysis

    3 Resilient Oil Stocks for a Down Market

    Stuck on oil? Take a look at these six stocks—three that present risk vs. three that offer some resiliency.
  3. Economics

    Keep an Eye on These Emerging Economies

    Emerging markets have been hammered lately, but these three countries (and their large and young populations) are worth monitoring.
  4. Stock Analysis

    Is Pepsi (PEP) Still a Safe Bet?

    PepsiCo has long been known as one of the most resilient stocks throughout the broader market. Is this still the case today?
  5. Investing

    The ABCs of Bond ETF Distributions

    How do bond exchange traded fund (ETF) distributions work? It’s a question I get a lot. First, let’s explain what we mean by distributions.
  6. Stock Analysis

    The 5 Best Dividend Stocks in the Healthcare Sector

    Learn about the top five dividend stocks of companies operating in the health care sector that generate substantial cash flows to afford high payouts.
  7. Stock Analysis

    3 Stocks that Are Top Bets for Retirement

    These three stocks are resilient, fundamentally sound and also pay generous dividends.
  8. Investing News

    Are Stocks Cheap Now? Nope. And Here's Why

    Are stocks cheap right now? Be wary of those who are telling you what you want to hear. Here's why.
  9. Investing News

    4 Value Stocks Worth Your Immediate Attention

    Here are four stocks that offer good value and will likely outperform the majority of stocks throughout the broader market over the next several years.
  10. Investing News

    These 3 High-Quality Stocks Are Dividend Royalty

    Here are three resilient, dividend-paying companies that may mitigate some worry in an uncertain investing environment.
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>

You May Also Like

Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!