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One way to search for potentially undervalued names is to compare current price to mean analyst target price. Stocks trading at significant discounts to target may be undervalued.

Another way to tell if a stock is trading below value is to look at the buying and covering activity of hedge funds and short sellers.

We combined all three of these ideas to create the list below. All names on the list have the following characteristics:

Trading at a Discount to Target Price: Analyst prices tend to be inflated most of the time, so we ran a screen that used the most pessimistic analyst target price as the benchmark for our analysis. In addition, we only focused on companies that have more than 5 analyst target prices (to make sure we only focus on companies that have decent analyst coverage). We took only those trading at the steep discounts to their most pessimistic target prices.

Short Covering: We screened for bullish sentiment from short sellers, with significant decreases in shares shorted month-over-month. This indicates that short sellers are less bearish on these names than they were a month ago.

Institutional Buying: We screened for significant buying activities of institutions, such as hedge funds, in the current quarter. We find this data valuable because their investment decisions are often the result of more information than the average investor.

Interactive Chart: Press Play to compare changes in analyst ratings over the last two years for the stocks mentioned below. Analyst ratings sourced from Zacks Investment Research. On average, they seem to all agree the stocks listed below are a "buy."

Tool provided by Kapitall. More investing ideas on Kapitall Wire.

The stocks in this list are trading at the steepest discounts to even their most pessimistic target prices. Short sellers think these stocks are poised to rise in value. Institutional buying activity also suggests these stocks are trading below fair value.

Do you agree with this optimism? List Average 1-Year Return: -33%.

1. AVEO Pharmaceuticals, Inc. (AVEO): Engages in the discovery and development of cancer therapeutics. Market cap at $297.39M, most recent closing price at $6.81.

Of the 6 analysts that have set a target price on the stock, the lowest price target stands at $9. This implies a potential upside of 32.15% from current levels around $6.81.

Net institutional purchases in the current quarter at 3.3M shares, which represents about 10.03% of the company's float of 32.91M shares. Shares shorted have decreased from 4.94M to 4.59M over the last month, a decrease which represents about 1.06% of the company's float of 32.91M shares. Days to cover ratio at 17.81 days.

2. Glu Mobile, Inc. (GLUU): Engages in the design, marketing, and sale of casual and traditional mobile games worldwide. Market cap at $147.26M, most recent closing price at $2.26.

Of the 10 analysts that have set a target price on the stock, the lowest price target stands at $3. This implies a potential upside of 32.74% from current levels around $2.26.

Net institutional purchases in the current quarter at 9.5M shares, which represents about 20.08% of the company's float of 47.32M shares. Shares shorted have decreased from 15.68M to 14.50M over the last month, a decrease which represents about 2.49% of the company's float of 47.32M shares. Days to cover ratio at 4.79 days.

3. Medicines Co. (MDCO): Provides various medicines to hospitals for advancing the treatment of critical care patients primarily in the United States and Europe. Market cap at $1.14B, most recent closing price at $21.27.

Of the 6 analysts that have set a target price on the stock, the lowest price target stands at $27. This implies a potential upside of 26.93% from current levels around $21.27.

Net institutional purchases in the current quarter at 3.6M shares, which represents about 7.54% of the company's float of 47.74M shares. Shares shorted have decreased from 2.95M to 2.43M over the last month, a decrease which represents about 1.09% of the company's float of 47.74M shares. Days to cover ratio at 4.9 days.

4. Swift Energy Co. (SFY): Engages in developing, exploring, acquiring, and operating oil and natural gas properties in Louisiana and Texas. Market cap at $624.92M, most recent closing price at $14.56.

Of the 13 analysts that have set a target price on the stock, the lowest price target stands at $19. This implies a potential upside of 30.49% from current levels around $14.56.

Net institutional purchases in the current quarter at 2.4M shares, which represents about 5.8% of the company's float of 41.39M shares. Shares shorted have decreased from 4.11M to 3.36M over the last month, a decrease which represents about 1.81% of the company's float of 41.39M shares. Days to cover ratio at 5.13 days.

*Target price and short data sourced from Thomson/First Call (via Yahoo! Finance), institutional data from Fidelity, all other data sourced from Finviz.

Source: Hedge Funds Recognize These Stocks Are Trading At Steep Discounts To Target Price