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To create the list below we began with a universe of stocks targeted by short sellers, with short floats above 10%, that are technically oversold (with RSI(14) below 40). About 75 stocks met the criteria.

We then looked for a possible fundamental catalyst which might have lead to the negative sentiment. So we looked at slower growth in quarterly revenue than growth in quarterly inventory year-over-year. We also looked for companies with quarterly inventory increasing as a percent of current assets.

When revenue is growing slower than inventory, it may indicate that the company is having trouble selling its inventory - although this might just indicate inventory building or a change in sales policies.

Do institutions think it might be an opportunity to buy stocks at cheap valuations? With this in mind we ran a final screen for 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 6 companies on our list.

A Closer Look

We looked at Trina Solar (TSL) in more detail. The stock trades around $4.23 versus its 52-week range of $2-$8.68, down 40% in the past 1-year.

As of December 31st, 2012, the company has cash and cash equivalents of $807 million, and restricted cash of $111 million. The company maintains a highly levered balance sheet with $1.9 billion in long-term debt, which includes $875 million in short-term borrowings, and $415 million in short-term borrowings. Also, there is $84 million in convertible due in the short-term.

Gross margins for full year 2012 were 1.9%, a significant decline from 7.1% in 2011, primarily impacted by a decline in the advanced module average sales price.

Trina Solar's performance is not unique among its competitors. One of the company's close competitor Suntech Power Holdings (STP), which has been on a losing streak. The stock's average daily alpha vs. the S&P500 index stands at -1.09% (measured close to close, over the last month). During this period, the longest losing streak lasted 5 days (i.e. the stock's daily returns underperformed the S&P 500 for 5 consecutive days). The longest winning streak lasted 2 days (i.e. a win streak / losing streak ratio of 0.4).

Do you think its time to buy or time to take risk off the books?

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.

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. AK Steel Holding Corporation (AKS): Produces flat-rolled carbon, stainless, and electrical steels, and tubular products primarily in the United States and internationally.

  • Market cap at $474.22M, most recent closing price at $3.48.
  • Net institutional purchases in the current quarter at 22.4M shares, which represents about 16.72% of the company's float of 133.99M shares. The 2 top holders of the stock are State Street Corporation, and The Vanguard Group.
  • Revenue grew by -5.71% during the most recent quarter ($1,423.1M vs. $1,509.2M y/y). Inventory grew by 45.5% during the same time period ($609.2M vs. $418.7M y/y). Inventory, as a percentage of current assets, increased from 32.85% to 42.23% during the most recent quarter (comparing 3 months ending 2012-12-31 to 3 months ending 2011-12-31).
  • Float short at 25%, and RSI (14) at 38

2. GrafTech International Ltd. (GTI): Manufactures graphite and carbon material science-based solutions.

  • Market cap at $876.15M, most recent closing price at $6.49.
  • Net institutional purchases in the current quarter at 9.4M shares, which represents about 8.53% of the company's float of 110.14M shares. The 2 top holders of the stock are Royce & Associates, and FMR, LLC.
  • Revenue grew by -7.26% during the most recent quarter ($320.72M vs. $345.83M y/y). Inventory grew by 33.66% during the same time period ($545.78M vs. $408.33M y/y). Inventory, as a percentage of current assets, increased from 59.83% to 66.54% during the most recent quarter (comparing 3 months ending 2012-09-30 to 3 months ending 2011-09-30).
  • Float short at 13%, and RSI (14) at 23.

3. Kronos Worldwide Inc. (KRO): Engages in the production and marketing of titanium dioxide pigments in North America and Europe.

  • Market cap at $1.96B, most recent closing price at $16.93.
  • Net institutional purchases in the current quarter at 1.8M shares, which represents about 9.02% of the company's float of 19.95M shares. The 2 top holders of the stock are American International Group, and LSV Asset Management.
  • Revenue grew by -13.7% during the most recent quarter ($472.9M vs. $548M y/y). Inventory grew by 79.45% during the same time period ($604.2M vs. $336.7M y/y). Inventory, as a percentage of current assets, increased from 40.06% to 57.29% during the most recent quarter (comparing 3 months ending 2012-09-30 to 3 months ending 2011-09-30).
  • Float short at 24%, and RSI (14) at 39.

4. Trina Solar Limited : Designs, develops, manufactures, and sells photovoltaic (PV) modules worldwide.

  • Market cap at $318.97M, most recent closing price at $3.92.
  • Net institutional purchases in the current quarter at 6.8M shares, which represents about 10.27% of the company's float of 66.20M shares. The 2 top holders of the stock are Franklin Resources, and Platinum Investment Management LTD.
  • Revenue grew by -38.17% during the most recent quarter ($297.97M vs. $481.9M y/y). Inventory grew by 9.5% during the same time period ($367.13M vs. $335.27M y/y). Inventory, as a percentage of current assets, increased from 18.35% to 21.14% during the most recent quarter (comparing 3 months ending 2012-09-30 to 3 months ending 2011-09-30).
  • Float short at 13%, and RSI (14) at 30.

5. Titan International Inc. (TWI): Manufactures wheels, tires, and assemblies for off-highway vehicles used in the agricultural, earthmoving/construction, and consumer markets in the United States.

  • Market cap at $1.12B, most recent closing price at $20.85.
  • Net institutional purchases in the current quarter at 4.1M shares, which represents about 9.09% of the company's float of 45.10M shares. The 2 top holders of the stock are Allianz Asset Management, and Lord Abbett & Co.
  • Revenue grew by 22.52% during the most recent quarter ($493.64M vs. $402.92M y/y). Inventory grew by 91.95% during the same time period ($366.38M vs. $190.87M y/y). Inventory, as a percentage of current assets, increased from 33.81% to 37.36% during the most recent quarter (comparing 3 months ending 2012-12-31 to 3 months ending 2011-12-31).
  • Float short at 13%, and RSI (14) at 29.

6. Walter Energy, Inc. (WLT): Produces and exports metallurgical coal for the steel industry primarily in the United States.

  • Market cap at $1.86B, most recent closing price at $29.76.
  • Net institutional purchases in the current quarter at 6.6M shares, which represents about 11.18% of the company's float of 59.03M shares. The 2 top holders of the stock are JP Morgan & Chase, and Harris Associates L.P.
  • Revenue grew by -11.15% during the most recent quarter ($611.97M vs. $688.75M y/y). Inventory grew by 65.18% during the same time period ($374.24M vs. $226.57M y/y). Inventory, as a percentage of current assets, increased from 27.64% to 43.19% during the most recent quarter (comparing 3 months ending 2012-09-30 to 3 months ending 2011-09-30).
  • Float short at 12%, and RSI (14) at 37.

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

Source: Hedge Funds Love 6 Highly Shorted And Oversold Stocks With Troubling Inventory Trends