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To create the list below we started by looking for stocks with a history of surprising the market with positive earnings reports, with an average earnings surprise of at least 5% over the last five quarterly reports. Clearly investors have a habit of underestimating these firms, but will the trend continue?

To find names that have the backing of "smart money" investors we then screened for bullish sentiment from institutional money mangers, 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.

Finally, we continued our analysis by looking at the financial statements for encouraging sales trends.

Specifically, we focused on 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.

The stocks in our list are 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.

The List

For an interactive version of this chart, click on the image below. Analyst ratings sourced from Zacks Investment Research.

Do you think these stocks will outperform like hedge funds expect? Use this list as a starting point for your own analysis.

1. Carter's, Inc. (NYSE:CRI): Designs, sources, and markets branded children's wear.

  • Market cap at $3.4B, most recent closing price at $57.37.
  • Net institutional purchases in the current quarter at 3.9M shares, which represents about 8.13% of the company's float of 47.98M shares. The 2 top holders of the stock are Berkshire Partners, and Viking Global Investors.
  • Revenue grew by 13.62% during the most recent quarter ($689.25M vs. $606.63M y/y). Accounts receivable grew by 6.53% during the same time period ($168.05M vs. $157.75M y/y). Receivables, as a percentage of current assets, decreased from 20.17% to 17.55% during the most recent quarter (comparing 13 weeks ending 2012-12-29 to 13 weeks ending 2011-12-31).
  • In Mar 2012: Reported EPS at 0.56 vs. estimate at 0.43 (surprise of 30.2%). In Jun 2012: Reported EPS at 0.37 vs. estimate at 0.3 (surprise of 23.3%). In Sep 2012: Reported EPS at 1.02 vs. estimate at 0.89 (surprise of 14.6%). In Dec 2012: Reported 0.89 vs. estimate at 0.84 (surprise of 6%. [Average earnings surprise at 18.53%].
  • The company is expected to report earnings on April 25th, 2013.

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

  • Market cap at $9.53B, most recent closing price at $68.54.
  • 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 Loews 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).
  • In Mar 2012: Reported EPS at 1.21 vs. estimate at 1 (surprise of 21%). In Jun 2012: Reported EPS at 1.09 vs. estimate at 0.9 (surprise of 21.1%). In Sep 2012: Reported EPS at 1.28 vs. estimate at 1.02 (surprise of 25.5%). In Dec 2012: Reported 1.41 vs. estimate at 1.1 (surprise of 28.2%. [Average earnings surprise at 23.95%].
  • The company is expected to report earnings on April 15th, 2013.

3. Ebix Inc. (NASDAQ:EBIX): Provides on-demand software and e-commerce solutions to the insurance industry.

  • Market cap at $607.03M, most recent closing price at $16.34.
  • Net institutional purchases in the current quarter at 1.8M shares, which represents about 5.43% of the company's float of 33.14M shares. The 2 top holders of the stock are FMR, LLC., and BMO Financial.
  • Revenue grew by 26.29% during the most recent quarter ($53.8M vs. $42.6M y/y). Accounts receivable grew by 19.08% during the same time period ($37.2M vs. $31.24M y/y). Receivables, as a percentage of current assets, decreased from 57.45% to 48.67% during the most recent quarter (comparing 3 months ending 2012-09-30 to 3 months ending 2011-09-30).
  • In Mar 2012: Reported EPS at 0.4 vs. estimate at 0.39 (surprise of 2.6%). In Jun 2012: Reported EPS at 0.47 vs. estimate at 0.39 (surprise of 20.5%). In Sep 2012: Reported EPS at 0.46 vs. estimate at 0.4 (surprise of 15%). In Dec 2012: Reported 0.48 vs. estimate at 0.45 (surprise of 6.7%. [Average earnings surprise at 11.2%].
  • The company is expected to report earnings on May 6th, 2013.

4. Ellie Mae (NYSE:ELLI): Provides an electronic mortgage origination network in the United States.

  • Market cap at $604.85M, most recent closing price at $23.13.
  • Net institutional purchases in the current quarter at 1.2M shares, which represents about 5.09% of the company's float of 23.57M shares. The 2 top holders of the stock are The Vanguard Group, and Driehaus Capital Management.
  • Revenue grew by 59.52% during the most recent quarter ($29.91M vs. $18.75M y/y). Accounts receivable grew by 37.47% during the same time period ($10.75M vs. $7.82M y/y). Receivables, as a percentage of current assets, decreased from 22.43% to 14.39% during the most recent quarter (comparing 3 months ending 2012-12-31 to 3 months ending 2011-12-31).
  • In Mar 2012: Reported EPS at 0.2 vs. estimate at 0.14 (surprise of 42.9%). In Jun 2012: Reported EPS at 0.27 vs. estimate at 0.12 (surprise of 125%). In Sep 2012: Reported EPS at 0.35 vs. estimate at 0.21 (surprise of 66.7%). In Dec 2012: Reported 0.27 vs. estimate at 0.21 (surprise of 28.6%. [Average earnings surprise at 65.8%].
  • The company is expected to report earnings on April 29th, 2013.

5. Generac Holdings Inc. (NYSE:GNRC): Manufactures automatic, stationary standby and portable generators.

  • Market cap at $2.42B, most recent closing price at $35.46.
  • Net institutional purchases in the current quarter at 8.1M shares, which represents about 19.21% of the company's float of 42.16M shares. The 2 top holders of the stock are Canada Pension Plan Investment Board, and BAMCO Inc.
  • Revenue grew by 27.95% during the most recent quarter ($342.02M vs. $267.31M y/y). Accounts receivable grew by 23.04% during the same time period ($134.98M vs. $109.7M y/y). Receivables, as a percentage of current assets, decreased from 28.62% to 25.83% during the most recent quarter (comparing 3 months ending 2012-12-31 to 3 months ending 2011-12-31).
  • In Mar 2012: Reported EPS at 0.96 vs. estimate at 0.71 (surprise of 35.2%). In Jun 2012: Reported EPS at 0.58 vs. estimate at 0.55 (surprise of 5.5%). In Sep 2012: Reported EPS at 0.78 vs. estimate at 0.71 (surprise of 9.9%). In Dec 2012: Reported 0.87 vs. estimate at 0.69 (surprise of 26.1%. [Average earnings surprise at 19.18%].
  • The company is expected to report earnings on May 6th, 2013.

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

  • Market cap at $979.55M, most recent closing price at $7.25.
  • Net institutional purchases in the current quarter at 10.5M shares, which represents about 9.02% of the company's float of 116.45M shares. The 2 top holders of the stock are Royce & Associates, and FMR, LLC.
  • Revenue grew by 6.62% during the most recent quarter ($371M vs. $347.98M y/y). Accounts receivable grew by 3.36% during the same time period ($261.65M vs. $253.15M y/y). Receivables, as a percentage of current assets, decreased from 34.59% to 31.79% during the most recent quarter (comparing 3 months ending 2012-12-31 to 3 months ending 2011-12-31).
  • In Mar 2012: Reported EPS at 0.12 vs. estimate at 0.07 (surprise of 71.4%). In Jun 2012: Reported EPS at 0.22 vs. estimate at 0.17 (surprise of 29.4%). In Sep 2012: Reported EPS at 0.22 vs. estimate at 0.18 (surprise of 22.2%). In Dec 2012: Reported 0.25 vs. estimate at 0.21 (surprise of 19%. [Average earnings surprise at 35.5%].
  • The company is expected to report earnings on April 25th, 2013.

*EPS data sourced from Yahoo! Finance, all other data sourced from Finviz.

Source: Hedge Funds Are Buying These 6 Stocks With A History Of Earnings Surprises