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To create the list below we began with a universe of basic materials stocks with 5-year projected EPS growth above 10%. Could there be a fundamental reason for this growth potential? We researched the financials of the companies on our list for reasons that could trigger the growth.

We screened the basic materials stocks for strong sales trends, comparing growth in revenue to growth in accounts receivable. Since accounts receivable is the portion of revenue not yet received, and there is no guarantee the money will ever be received, the smaller the portion of revenue made up of receivables, the healthier the company's revenue.

We screened for stocks seeing faster growth in revenue than accounts receivable year-over-year, as well as accounts receivable comprising a smaller portion of current assets over the same time period.

Finally, we researched their 13F's looking for those 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.

3 stocks met the criteria.

The List

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

Would you invest in these companies? Use this list as a starting point for your analysis.

1. Diamond Offshore Drilling Inc. (DO): Operates as an offshore oil and gas drilling contractor worldwide.

  • Market cap at $9.46B, most recent closing price at $68.96.
  • Net institutional purchases in the current quarter at 5.3M shares, which represents about 7.69% of the company's float of 68.90M shares. The 2 top holders of the stock are Lowes Corporation, and T. Rowe Price.
  • Revenue grew by 0.29% during the most recent quarter ($750.54M vs. $748.36M y/y). Accounts receivable grew by -13.44% during the same time period ($488.11M vs. $563.92M y/y). Receivables, as a percentage of current assets, decreased from 28.3% to 22.88% during the most recent quarter (comparing 3 months ending 2012-12-31 to 3 months ending 2011-12-31).
  • 5-year projected EPS growth at 16%.
  • Despite these encouraging figures short sellers think there's downside to this stock, especially when comparing short float to industry averages. DO's short float stands at 6.60%, which is equivalent to 7.52 days of average trading volume. As an example, this is much higher than Petroleo Brasileiro (short float at 0.29%, representing 0.65 days of trading volume) and Petroleo Brasileiro (short float at 0.37%, representing 1.36 days of trading volume).

2. Transocean Ltd. (RIG): Provides offshore contract drilling services for oil and gas wells worldwide.

  • Market cap at $16.25B, most recent closing price at $50.90.
  • Net institutional purchases in the current quarter at 24.3M shares, which represents about 7.49% of the company's float of 324.63M shares. The 2 top holders of the stock are FMR Corporation, and Capital Research and Management Company.
  • Revenue grew by 10.85% during the most recent quarter ($2,278M vs. $2,055M y/y). Accounts receivable grew by 1.1% during the same time period ($2,200M vs. $2,176M y/y). Receivables, as a percentage of current assets, decreased from 28.87% to 25.44% during the most recent quarter (comparing 3 months ending 2012-12-31 to 3 months ending 2011-12-31).
  • 5-year projected EPS growth at 22%.
  • EPS trends get better: The RIG reported strong earnings growth over the last year, with EPS growing by 112.52%, higher than competitors like SeaDrill Limited (EPS growth over the last year at 3.76%) and Cenovus Energy Inc. (EPS growth over the last year at -32.89%).

3. Valero Energy Corporation (VLO): Operates as an independent petroleum refining and marketing company.

  • Market cap at $24.48B, most recent closing price at $44.95.
  • Net institutional purchases in the current quarter at 28.2M shares, which represents about 5.12% of the company's float of 550.80M shares. The 2 top holders of the stock are State Street Corporation, and The Vanguard Group.
  • Revenue grew by 0.06% during the most recent quarter ($34,695M vs. $34,673M y/y). Accounts receivable grew by -6.53% during the same time period ($8,336M vs. $8,918M y/y). Receivables, as a percentage of current assets, decreased from 55.84% to 50.64% during the most recent quarter (comparing 3 months ending 2012-12-31 to 3 months ending 2011-12-31).
  • 5-year projected EPS growth at 12%. This is higher than close competitors Marathon Oil Corporation (projected EPS growth over next 5 years at 4.91%) and Imperial Oil Ltd. (projected EPS growth over next 5 years at 3.55%).

*Accounting data sourced from Google Finance, all other data sourced from Finviz.

Source: Hedge Funds Are Buying These 3 High-Growth Energy Stocks With Encouraging Sales Trends