Is The Bad News Already Priced In For These 5 Short Squeeze Picks?

by: Contextuall

There have been academic studies that show investors tend to place too much importance on recent information, also known as psychological anchoring.

During periods of negative news, investors may continue to sell a stock, pushing it below its fair value. Conversely, during periods of positive news, investors may get overly optimistic and push the stock beyond fair value.

Our goal is to identify examples where herd behavior has reached extreme levels, by using automated sentiment analysis on recent news headlines, and combining these stats with actual fundamentals and performance trends.

We believe that, by identifying these areas of one-sided sentiment, investors could use these contrarian signals as a starting point for their own research.

The following list of stocks are all oversold by technical measures, and all of these names have large short interest. In addition, these companies have seen extremely negative news coverage over recent weeks.

All this leads us to think that most of the bad news may already be priced into these names.

For each company we'll list a quick explanation on why the shares are down, along with potential catalysts that could reverse the trend.

We'll also include news sentiment statistics for each company, and compare their sentiment values relative to their industries. (Click on any of the table links to view the sentiment calculations)

1. Accretive Health, Inc. (AH)

News Headline Sentiment Accretive Health, Inc. (AH) Business Services
Positive Sentiment 16.67% 27.0%
Negative Sentiment 35.56% 23.0%
Neutral Sentiment 47.78% 50.0%

Key Stats:

RSI(14) at 34.08, with short float representing 11.23 days of average trading volume.

Why the stock is down:

Investors are worried about accounting irregularities. The company lost more than a fifth of their value on February 27, announcing that it was delaying its fourth-quarter and full-year earnings report to evaluate the way it recognizes revenue.

From Marketwatch: Minnesota Attorney General Lori Swanson had accused the company of using "Glengarry Glen Ross" tactics - alluding to the Broadway play and subsequent film about the lives of high-pressure salesmen - in collecting fees from patients in the company's emergency rooms, cancer wards and delivery rooms.

Why the stock could rebound:

For one, there's fresh management in place. The company recently announced that Stephen Schuckenbrock, formerly president of Dell Services, has been named President and CEO and a member of the Accretive Board of Directors effective on April 3.

New management can be a good thing, especially since they have an opportunity to "flush out" the company's dirty laundry and blame it on the previous management team…

2. Central European Media Enterprises Ltd. (NASDAQ:CETV)

News Headline Sentiment Central European Media Enterprises Ltd. (CETV) Television Industry
Positive Sentiment 9.43% 34.0%
Negative Sentiment 35.85% 13.0%
Neutral Sentiment 54.72% 53.0%

Key Stats:

RSI(14) at 34.79, with short float representing 39.28 days of average trading volume.

Why the stock is down:

Hedge funds have been running for the exits. At year's end, a total of 6 of the hedge funds tracked by Insider Monkey held long positions in this stock, a 40% decline from one quarter earlier.

Jeffries also downgraded the stock from buy to hold on April 5th, cutting their price target from $12 to $5.

Why the stock could rebound:

The company recently announced plans to repurchase its 2014 bonds for $71.1 million, as part of a plan to reduce its leverage.

"The reduction in the debt should be a turning point for the company's profitability and cash flows going forward, as it will reduce the interest expense significantly," writes our fellow contributors at Qineqt.

"There are expectations that the company will break even in 2Q2012 and this will be a major trigger for the stock price."

3. Gentium S.p.A (GENT)

News Headline Sentiment Gentium S.p.A (GENT) Drug Manufacturing
Positive Sentiment 15.63% 37.0%
Negative Sentiment 23.44% 12.0%
Neutral Sentiment 60.94% 51.0%

Key Stats:

RSI(14) at 33.97, with short float representing 10.60 days of average trading volume.

Why the stock is down:

The European Medicines Agency's Committee for Medicinal Products for Human Use ("CHMP") has adopted a negative opinion on Defibrotide, refusing to grant marketing authorization to treat and prevent hepatic veno-occlusive disease ("VOD") in adults and children undergoing hematopoietic stem cell transplantation therapy.

Why the stock could rebound:

The company's has appealed against the CHMP decision, and they remain convinced of the favorable benefit/risk profile of Defibrotide.

A word of caution though--a director of the company recently resigned, following a disagreement with other directors regarding his proposal to form a new committee to provide additional oversight for Defibrotide. On the surface this feels like a major red flag…

4. Globe Specialty Metals, Inc. (NASDAQ:GSM)

News Headline Sentiment Globe Specialty Metals, Inc. (GSM) Industrials and Manufacturing
Positive Sentiment 20.37% 26.0%
Negative Sentiment 24.07% 18.0%
Neutral Sentiment 55.56% 56.0%

Key Stats:

RSI(14) at 31.21, with short float representing 10.87 days of average trading volume.

Why the stock is down:

Weak earnings and margin growth, sub-par return on equity and earnings revisions, just to name three reasons. The company has struggled to keep costs down…

Why the stock could rebound:

The company has announced aggressive cost-cutting initiatives, leading to clashes with unionized workers. If the company can manage this transition with minimal disruption, it could benefit from an improved cost structure and increased competitiveness.

5. Pep Boys - Manny, Moe & Jack (NYSE:PBY)

News Headline Sentiment Pep Boys - Manny, Moe & Jack (PBY) Auto Industry
Positive Sentiment 16.67% 28.0%
Negative Sentiment 17.95% 12.0%
Neutral Sentiment 65.38% 60.0%

Key Stats:

RSI(14) at 30.92, with short float representing 12.63 days of average trading volume.

Why the stock is down:

The company recently reported weak earnings results, mainly attributable to hefty pension-related expenses in the quarter.

Why the stock could rebound:

Aside from the one-time pension charge, there's plenty of encouraging trends in the recent earnings report.

Improving liquidity: Cash and cash equivalents of $59.2 million as of Feb 2, 2013, vs. $58.2 million at the end of Jan 2012. Long-term debt declined to $200.0 million (compared with $295.1 million at end of Jan 2012)

Improving cash flows: Cash flow from operations improved to $89.0 million from $73.9 million in the prior year.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.