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If you are interested in potentially underestimated stocks, here is a list that may give some interesting ideas.

We started by looking for stocks that are being targeted by short sellers, with short floats above 10%, and that are also technically oversold (with RSI(14) below 40). About 40 stocks met the criteria.

We then looked for a possible fundamental catalyst, which might have lead to the negative sentiment.

Although receivables are considered to be an asset, it becomes a risk when receivables grow and revenues decline. We looked through 40 balance sheets to find those with negative trends in revenue relative to accounts receivable, with slower growth in revenue year-over-year than growth in accounts receivable, as well as receivables comprising a larger portion of current assets.

Receivables represent the portion of revenue not yet collected, so the smaller the portion of revenue and current assets, the better.

Do institutions think it might be an opportunity to buy stocks at cheap valuations? We finally screened for those stocks with bullish sentiment from institutional investors, with significant net institutional purchases over the last quarter representing at least 5% of share float. This indicates that institutional investors such as hedge fund managers and mutual fund managers expect these names to outperform into the future.

We were left with 4 companies on our list.

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.

A Closer Look

We took a closer look at Higher One Inc. (ONE). The company's balance sheet consists of $27 million in cash & cash equivalents. Additional liquidity is in the form of a $200 million, 5-year senior secured credit facility due October 16th, 2017. The Credit Facility contains certain negative covenants that, among other things, restrict the company from incurring additional indebtedness. Although a restriction, this covenant prevents the company from becoming highly levered, which we consider to be a favorable covenant.

Total contractual obligations of the company are available in the table below:

(click to enlarge)

We urge investors to track the following factors before investing in the company:

  • Management's plans of acquisitions going forward
  • Any possibility of covenant violation due to sales deterioration
  • The impact of federal and state privacy laws, which could limit the company's ability to conduct business

The List

Do you think hedge funds are calling it right on these names? Use this list as a starting point for your own analysis.

1. Cincinnati Bell Inc. (CBB): Provides data and voice communications services over wireline and wireless networks, as well as offers data center operations, related management services, and equipment in the United States.

  • Market cap at $941.31M, most recent closing price at $4.72.
  • Net institutional purchases in the current quarter at 13.6M shares, which represents about 7.55% of the company's float of 180.05M shares. The top 2 holders of the stock are GAMCO Investors, and Wells Fargo & Co.
  • Revenue grew by -0.16% during the most recent quarter ($368.2M vs. $368.8M y/y). Accounts receivable grew by 8.51% during the same time period ($193.8M vs. $178.6M y/y). Receivables, as a percentage of current assets, increased from 51.51% to 67.9% during the most recent quarter (comparing 3 months ending 2012-09-30 to 3 months ending 2011-09-30).
  • Float short at 12.92%, and RSI (14) at 30.69.

2. Fusion-io, Inc. (FIO): Focuses on the development, marketing, and sale of storage memory platforms for data decentralization.

  • Market cap at $1.67B, most recent closing price at $17.25.
  • Net institutional purchases in the current quarter at 10.3M shares, which represents about 13.29% of the company's float of 77.51M shares. The top 2 holders of the stock are FMR, LLC, and NEA Management Company.
  • Revenue grew by 58.77% during the most recent quarter ($118.11M vs. $74.39M y/y). Accounts receivable grew by 94.69% during the same time period ($65.67M vs. $33.73M y/y). Receivables, as a percentage of current assets, increased from 10.86% to 13.26% during the most recent quarter (comparing 3 months ending 2012-09-30 to 3 months ending 2011-09-30).
  • Float short at 23%, and RSI (14) at 29.60.

3. Lexmark International Inc. (LXK): Develops, manufactures, and supplies printing and imaging solutions for offices.

  • Market cap at $1.55B, most recent closing price at $24.0.
  • Net institutional purchases in the current quarter at 5.5M shares, which represents about 8.71% of the company's float of 63.16M shares. The top 2 holders of the stock are Artisan Partners Limited Partnership, and FMR, LLC.
  • Revenue grew by -11.18% during the most recent quarter ($919.2M vs. $1,034.9M y/y). Accounts receivable grew by 11.64% during the same time period ($522.9M vs. $468.4M y/y). Receivables, as a percentage of current assets, increased from 20.43% to 27.23% during the most recent quarter (comparing 3 months ending 2012-09-30 to 3 months ending 2011-09-30).
  • Float short at 22.56%, and RSI (14) at 36.92.

4. Higher One Inc. : Provides technology and payment services to the higher education industry in the United States.

  • Market cap at $513.4M, most recent closing price at $9.74.
  • Net institutional purchases in the current quarter at 3.2M shares, which represents about 12.8% of the company's float of 25.00M shares. The top 2 holders of the stock are Brave Warrior Advisors, LLC, and Wasatch Advisors.
  • Revenue grew by 6.42% during the most recent quarter ($51.23M vs. $48.14M y/y). Accounts receivable grew by 63.14% during the same time period ($19.3M vs. $11.83M y/y). Receivables, as a percentage of current assets, increased from 16.55% to 34.07% during the most recent quarter (comparing 3 months ending 2012-09-30 to 3 months ending 2011-09-30).
  • Float short at 26%, and RSI (14) at 36.11.

*Institutional data sourced from Fidelity, all other data sourced from Finviz

Source: Hedge Funds Are Buying These 4 Oversold, Highly Shorted Stocks With Troubling Sales Trends