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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 90 stocks met the criteria.

We then looked for a possible catalyst, which might have lead to the negative sentiment. We screened for stocks on a losing streak. We screened for this by measuring the number of days in which the stock beat the S&P 500 over the last month and the number of days in which it underperformed the S&P 500. We then compared the longest winning streak in days over the last month to the longest losing streak, and found those stocks with the lowest ratios, indicating these stocks have been underperforming the S&P 500.

Finally, do institutions think it might be an opportunity to buy stocks at low 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 5 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.

(click to enlarge)

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 $427.89M, most recent closing price at $3.06.
  • Float short at 28%, and RSI (14) at 30.55
  • Net institutional purchases in the current quarter at 23.0M shares, which represents about 17.13% of the company's float of 134.30M shares. The 2 top holders of the stock are State Street Corp., and The Vanguard Group.
  • The stock's average daily alpha vs. the S&P500 index stands at -1.03% (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).

2. Forest Oil Corp. (FST): Engages in the acquisition, exploration, development, and production of oil, natural gas, and natural gas liquids primarily in North America.

  • Market cap at $598.99M, most recent closing price at $4.86.
  • Float short at 18%, and RSI (14) at 33.39.
  • Short sellers have become slightly more bullish: Shares shorted have decreased from 20.82M to 19.76M over the last month, a decrease which represents about 1.22% of the company's float of 86.76M shares. Days to cover ratio at 5.16 days.
  • Net institutional purchases in the current quarter at 6.4M shares, which represents about 7.38% of the company's float of 86.76M shares. The 2 top holders of the stock are Owl Creek Asset Management, and S.A.C. Capital Advisors.
  • The stock's average daily alpha vs. the S&P500 index stands at -0.98% (measured close to close, over the last month). During this period, the longest losing streak lasted 6 days (i.e. the stock's daily returns underperformed the S&P 500 for 6 consecutive days). The longest winning streak lasted 2 days (i.e. a win streak / losing streak ratio of 0.33).

3. KiOR, Inc. (KIOR): Focuses on operating as a renewable fuels company.

  • Market cap at $479.18M, most recent closing price at $4.3.
  • Float short at 12%, and RSI (14) at 38.
  • Net institutional purchases in the current quarter at 2.0M shares, which represents about 8.96% of the company's float of 22.32M shares. The 2 top holders of the stock are Artis Capital Management, and Frontier Capital Management.
  • The stock's average daily alpha vs. the S&P500 index stands at -1.71% (measured close to close, over the last month). During this period, the longest losing streak lasted 10 days (i.e. the stock's daily returns underperformed the S&P 500 for 10 consecutive days). The longest winning streak lasted 3 days (i.e. a win streak / losing streak ratio of 0.3).

4. SandRidge Energy, Inc. (SD): Operates as an independent natural gas and oil company in the United States.

  • Market cap at $2.54B, most recent closing price at $5.05.
  • Float short at 14%, and RSI (14) at 40.
  • Short sellers are becoming more bearish: Shares shorted have increased from 57.80M to 65.44M over the last month, an increase which represents about 2.54% of the company's float of 301.06M shares. Days to cover ratio at 6.03 days.
  • Net institutional purchases in the current quarter at 40.4M shares, which represents about 13.42% of the company's float of 301.07M shares. The 2 top holders of the stock are Riverstone Holdings LLC, and Carlyle Group.
  • The stock's average daily alpha vs. the S&P500 index stands at -0.81% (measured close to close, over the last month). During this period, the longest losing streak lasted 9 days (i.e. the stock's daily returns underperformed the S&P 500 for 9 consecutive days). The longest winning streak lasted 2 days (i.e. a win streak / losing streak ratio of 0.22).

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

  • Market cap at $1.51B, most recent closing price at $24.11.
  • Float short at 14%, and RSI (14) at 32.68.
  • Net institutional purchases in the current quarter at 7.0M shares, which represents about 12.55% of the company's float of 55.76M shares. The 2 top holders of the stock are JP Morgan Chase & Co., and Harris Associates L.P.
  • The stock's average daily alpha vs. the S&P500 index stands at -1.41% (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 1 day (i.e. a win streak / losing streak ratio of 0.2).

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

Source: Hedge Funds Are Buying 5 Highly Shorted And Oversold Small Caps On Losing Streaks