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Looking for undervalued stocks? Value investors look for opportunities to buy stocks that are trading at significant discounts to their fair value, with the assumption that they will move up to their fair value in the near future. One proxy for fair value is analyst target price.

We ran a screen on stocks with market caps above $100 million, for those trading at steep discounts to their analyst target prices, which may indicate that they are undervalued.

But because target prices are notoriously inflated, we only used the most pessimistic (the lowest) target prices, and for stocks with sufficient analyst coverage we only screened for stocks with 5 or more analyst ratings.

With nearly 80 companies meeting this criteria we further screened for bullish sentiment from investors as a signal that upside is indeed expected.

We used short seller and institutional buying data. We pulled only names with significant net increases in hedge fund buying in the current quarter totaling at least 5% of share float. We then looked for significant decreases in shares shorted month-over month, where the decrease represents over 1% of the company's float.

Interactive Chart: Press Play to compare changes in analyst changes over the last two years for the three stocks mentioned below.

List sorted by potential upside to lowest analyst target price.

1. Sunesis Pharmaceuticals Inc. (NASDAQ:SNSS): Focuses on the development and commercialization of oncology therapeutics for the treatment of solid and hematologic cancers.

  • Market cap at $267.18M, most recent closing price at $5.18.
  • Of the 8 analysts that have set a target price on the stock, the lowest price target stands at $6.56. This implies a potential upside of 22.84% from current levels around $5.34.
  • Net institutional purchases in the current quarter at 3.9M shares, which represents about 17.43% of the company's float of 22.38M shares.
  • Shares shorted have decreased from 8.10M to 7.70M over the last month, a decrease which represents about 1.79% of the company's float of 22.38M shares. Days to cover ratio at 13.86 days.

2. Herbalife Ltd. (NYSE:HLF): A network marketing company, sells weight management, nutritional supplement, energy, sports and fitness, and personal care products worldwide.

  • Market cap at $3.87B, most recent closing price at $37.55.
  • Of the 7 analysts that have set a target price on the stock, the lowest price target stands at $45. This implies a potential upside of 17.924% from current levels around $38.16.
  • Net institutional purchases in the current quarter at 17.2M shares, which represents about 22.66% of the company's float of 75.92M shares.
  • Shares shorted have decreased from 33.60M to 32.43M over the last month, a decrease which represents about 1.54% of the company's float of 75.92M shares. Days to cover ratio at 3.63 days.

3. Boingo Wireless, Inc. (NASDAQ:WIFI): Provides mobile Wi-Fi Internet solutions.

  • Market cap at $196.32M, most recent closing price at $5.51.
  • Of the 5 analysts that have set a target price on the stock, the lowest price target stands at $6.5. This implies a potential upside of 16.279% from current levels around $5.59.
  • Net institutional purchases in the current quarter at 4.5M shares, which represents about 22.08% of the company's float of 20.38M shares.
  • Shares shorted have decreased from 2.05M to 1.80M over the last month, a decrease which represents about 1.23% of the company's float of 20.38M shares. Days to cover ratio at 14.78 days.


*Predictive analyst ratings sourced from Reuters, short data from Yahoo! Finance, institutional data from Fidelity. All other data sourced from Finviz.

Source: Hedge Funds Are Buying 3 Undervalued Stocks With Short Covering