Bet Against the Short Sellers in 2014?

Short sellers had a tough time in 2013. William Ackman’s bet again Herbalife (HLF), which has gained 139% this year, went horribly bad, while other heavily shorted stocks, including Supervalu (SVU) and Netflix (NFLX), have posted gains that make that look paltry.

Bloomberg News

In fact, though Dec. 6, betting for shares of the most heavily shorted stocks to rise more than the least-shorted stocks would have been a winning strategy in 2013, after two years of losses, according to JPMorgan. The most-shorted stocks rose 1.1 percentage points more than the S&P 500,  while the least-shorted stocks returned 0.4% less than the S&P 500.

JPMorgan’s Thomas Lee explains why the heavily shorted stocks outperformed in 2014. He writes:

The equity market broadened in 2013 (allowing more stocks to outperform), causing the short-selling win ratio to fall;

Anecdotally, we found many short ideas crowded, as evidenced by some stocks seeing a sizable portion of its float sold short.

And wouldn’t you know it, Lee expects the trend to continue in 2014. He took the most shorted stocks in S&P 500 with market cap’s of $3 billion or more that were also rated Overweight by JPMorgan analysts and had upside to their targets. His list includes refiner Tesoro (TSO), General Motors (GM) and Peabody Energy (BTU) among others.

Let the good times roll, except for the short sellers, that is.

Shares of Herbalife have gained 0.3% to $78.76 today, while Supervalu has risen 0.7% to $7.08, Netflix has dropped 0.2% to $377.50, Tesoro has advanced 0.3% to $58.41, General Motors has jumped 1.6% to $41.55 and Peabody Energy is up 0.7% at $18.65.

Corrections & Amplifications: This post originally stated the returns from the most- and least- shorted stocks as absolute values, rather than relative to the S&P 500.