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Looking to follow the trends set by "smart money" investors? If so you may be interested in this list, which combines institutional purchases with history of outperformance.

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.

To look for stocks that appear undervalued, we looked for companies that appear undervalued relative to their cash flows, indicated by high ratios of levered free cash flow/enterprise value.

Levered free cash flow is the free cash flow after deducting interest payments on outstanding debt. Enterprise value is the sum of the firm's value from all ownership sources: market cap, outstanding debt, and preferred shares. When companies have ratios of levered free cash flow/enterprise value in excess of 10%, it may indicate that the company as a whole is being undervalued.

Finally, we screened 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 and mutual fund managers expect these names to outperform into the future.

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. Booz Allen Hamilton (BAH): Provides professional services primarily to US government agencies in the defense, security, and civil sectors, as well as to corporations, institutions, and not-for-profit organizations.

  • Market cap at $1.97B, most recent closing price at $14.54.
  • Net institutional purchases in the current quarter at 2.6M shares, which represents about 7.78% of the company's float of 33.41M shares. The 2 top holders of the stock are The Carlyle Group, and BAMCO Inc.
  • Levered free cash flow at $498.41M vs. enterprise value at $3.35B (implies a LFCF/EV ratio at 14.88%).
  • In Mar 2012: Reported EPS at 0.44 vs. estimate at 0.41 (surprise of 7.3%). In June 2012: Reported EPS at 0.46 vs. estimate at 0.42 (surprise of 9.5%). In Sep 2012: Reported EPS at 0.39 vs. estimate at 0.38 (surprise of 2.6%). In Dec 2012: Reported 0.41 vs. estimate at 0.38 (surprise of 7.9%. [Average earnings surprise at 6.82%].
  • The company is expected to report earnings on May 27th, 2013.

2. magicJack VocalTec Ltd. (CALL): Provides voice over internet protocol services in the United States.

  • Market cap at $306.45M, most recent closing price at $16.52.
  • Net institutional purchases in the current quarter at 1.9M shares, which represents about 19.75% of the company's float of 9.62M shares. The 2 top holders of the stock are Adams Street Partners, and Thompson, Siegel & Walmsley Inc.
  • Levered free cash flow at $31.83M vs. enterprise value at $283.97M (implies a LFCF/EV ratio at 11.21%).
  • In Mar 2012: Reported EPS at 0.24 vs. estimate at 0.2 (surprise of 20%). In June 2012: Reported EPS at 0.51 vs. estimate at 0.48 (surprise of 6.3%). In Sep 2012: Reported EPS at 0.95 vs. estimate at 0.6 (surprise of 58.3%). In Dec 2012: Reported 1.17 vs. estimate at 0.51 (surprise of 129.4%. [Average earnings surprise at 53.5%].
  • The company is expected to report earnings on May 1st, 2013.

3. CSG Systems International, Inc. (CSGS): Provides outsourced customer care and billing solutions primarily to the cable and direct broadcast satellite industry in North America.

  • Market cap at $725.01M, most recent closing price at $21.33.
  • Net institutional purchases in the current quarter at 2.4M shares, which represents about 8.39% of the company's float of 28.61M shares. The 2 top holders of the stock are Bank of New York Mellon Corporation, and River Road Asset Management.
  • Levered free cash flow at $101.89M vs. enterprise value at $751.86M (implies a LFCF/EV ratio at 13.55%).
  • In Mar 2012: Reported EPS at 0.6 vs. estimate at 0.49 (surprise of 22.4%). In June 2012: Reported EPS at 0.56 vs. estimate at 0.45 (surprise of 24.4%). In Sep 2012: Reported EPS at 0.5 vs. estimate at 0.47 (surprise of 6.4%). In Dec 2012: Reported 0.67 vs. estimate at 0.48 (surprise of 39.6%. [Average earnings surprise at 23.2%].
  • The company is expected to report earnings on April 30th, 2013.

4. Delek US Holdings Inc. (DK): Engages in refining, wholesaling, and marketing petroleum products in the United States.

  • Market cap at $2.14B, most recent closing price at $36.48.
  • Net institutional purchases in the current quarter at 6.7M shares, which represents about 18.5% of the company's float of 36.22M shares. The 2 top holders of the stock are The Vanguard Group, and Acadian Asset Management.
  • Levered free cash flow at $321.66M vs. enterprise value at $1.88B (implies a LFCF/EV ratio at 17.11%).
  • In Mar 2012: Reported EPS at 0.79 vs. estimate at 0.61 (surprise of 29.5%). In June 2012: Reported EPS at 1.17 vs. estimate at 1.03 (surprise of 13.6%). In Sep 2012: Reported EPS at 1.67 vs. estimate at 1.54 (surprise of 8.4%). In Dec 2012: Reported 1.06 vs. estimate at 1 (surprise of 6%. [Average earnings surprise at 14.37%].
  • The company is expected to report earnings on April 29th, 2013.

*Institutional data sourced from Fidelity. FCF data sourced from Yahoo! Finance.

Source: Hedge Funds Are Buying 4 Undervalued Stocks With A History Of Positive Earnings Surprises