To create this list we began by searching for evidence of institutional buying among European companies.
We ran a screen for stocks that experienced 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 stocks to outperform in the future.
We then narrowed it down by looking for reasons why these stocks are appealing to institutional buyers. We screened the list for positive trends in inventory, namely stocks with growth in quarterly revenue greater than growth in quarterly inventory.
Since inventory represents the portion of goods not yet sold, faster growth in revenue than inventory is considered an encouraging sign. This may indicate that the company is selling its inventory more readily than in the past - although this might just be a reflection of a change in sales strategies.
We were left with three companies on our list.
For an interactive version of this chart, click on the image below. Analyst ratings sourced from Zacks Investment Research
Hedge funds are signaling that these encouraging sales trends reflect well on the future prospects of these companies. Do you agree with their sentiment? Use this list as a starting point for your own analysis.
1. Core Laboratories NV (CLB): (Netherlands) Provides reservoir description, production enhancement, and reservoir management products and services to the oil and gas industry worldwide.
- Market cap at $6.58B, most recent closing price at $143.24.
- Net institutional purchases in the current quarter at 5.9M shares, which represents about 13.06% of the company's float of 45.16M shares.
- Top institutional owners are Capital World Investors (8.52%), Carmignac Gestion (7.77%) and Brown Advisory Inc. (6.22%).
- Revenue grew by 11.42% during the most recent quarter ($260.93M vs. $234.19M y/y). Inventory grew by -12.65% during the same time period ($50.77M vs. $58.12M y/y).
- Inventory, as a percentage of current assets, decreased from 20.44% to 16.23% during the most recent quarter (comparing 3 months ending 2013-03-31 to 3 months ending 2012-03-31).
CLB has performed in line with the rest of its industry since 4/8/13, returning 8.05% over the last month, surpassing Baker Hughes Incorporated (BHI) and Schlumberger Limited (SLB), but worse than industry leaders like Halliburton Company (HAL) and Weatherford International Ltd. (WFT), which returned 12.11% and 8.25% respectively.
However, when comparing valuation ratios to industry averages, CLB looks expensive. The stock's Price / Free Cash Flow ratio stands at 41.11, much higher than SLB (P/FCF ratio at 0) and WFT (P/FCF ratio at 0).
According to Yahoo! Finance, last month CLB released 2013 Q1 earnings that featured the company's most profitable quarter to date, during which time they returned more than $62M to shareholders through dividends. CLB credited international efforts, especially deepwater hydrocarbon operations, as one of the many reasons for the stellar quarterly results. The rest of 2013 will bring new ventures including technological methods to increase hydrocarbon recovery rates and the expansion of reservoir developments across the globe.
2. Gentium S.p.A (GENT): (Italy) Focuses on the development and manufacture of its primary product candidate, defibrotide, an investigational drug based on a mixture of single-stranded and double-stranded DNA extracted from pig intestines.
- Market cap at $118.67M, most recent closing price at $7.89.
- Net institutional purchases in the current quarter at 558.9K shares, which represents about 6.54% of the company's float of 8.54M shares.
- Top institutional owners are BlackRock Advisors, LLC (29.52%), FMR LLC (7.70%) and Franklin Resources, Inc (2.11%).
- Revenue grew by 40.04% during the most recent quarter ($7.38M vs. $5.27M y/y). Inventory grew by -5.99% during the same time period ($2.98M vs. $3.17M y/y).
- Inventory, as a percentage of current assets, decreased from 17.02% to 14.91% during the most recent quarter (comparing 3 months ending 2012-09-30 to 3 months ending 2011-09-30).
GENT has turned in a slightly less than average performance 4/8/13, returning -1.38% over the last month. This performance has been better than Teva Pharmaceutical Industries Limited (TEVA) and Allergan Inc. (AGN), but worse than industry leaders like Novo Nordisk A/S (NVO) and Forest Laboratories Inc. (FRX), which returned 4.28% and -0.77% respectively.
Short sellers think there's more downside to the stock, especially when comparing short float to industry averages. GENT short float stands at 4.34%, which is equivalent to 10.28 days of average trading volume. As an example, this is much higher than NVO (short float at 0.17%, representing 1.6 days of trading volume) and TEVA (short float at 0.54%, representing 1.18 days of trading volume).
The company's primary product, defibrotide, received a negative opinion from the European Medicines Agency's Committee for Medicinal Products for Human Use in March of this year. GENT announced it had appealed for a re-examination of the negative opinion, and the drug will continue to be available to patients in the EU under a named patient program, where available. Defibrotide was designed to treat and prevent hepatic veno-occlusive disease (VOD) for those patients undergoing hematopoietic stem cell transplantation therapy, currently the sole treatment the European Group for Blood and Marrow Transplantation, recommends, as reported by The New York Times.
3. CNH Global NV (CNH): (Netherlands) Distributes a line of agricultural and construction equipment and parts worldwide.
- Market cap at $10.26B, most recent closing price at $42.32.
- Net institutional purchases in the current quarter at 3.7M shares, which represents about 12.18% of the company's float of 30.39M shares.
- Top institutional owners are Bank of America Corporation (13.51%), Van Eck Associates Corporation (11.75%) and Gamco Investors Inc (7.15%).
- Revenue grew by 1.04% during the most recent quarter ($4,950M vs. $4,899M y/y). Inventory grew by -2.7% during the same time period ($4,212M vs. $4,329M y/y).
- Inventory, as a percentage of current assets, decreased from 17.03% to 15.42% during the most recent quarter (comparing 3 months ending 2013-03-31 to 3 months ending 2012-03-31).
CNH has performed poorly since 4/8/13, especially when compared to industry competitors. The stock returned 3.42% over the last month, much lower than AGCO Corporation (AGCO) and Deere & Company (DE), which returned 7.10% and 5.38% during the same time period. Only Joy Global, Inc. (JOY) performed worse, returning 3.31%.
The company has reported strong earnings growth over the last year, with EPS growing by 21.42%, higher than competitors like DE (EPS growth over the last year at 15.17%) and Caterpillar Inc. (CAT) (EPS growth over the last year at 14.68%). CNH also has a higher than average projected earnings growth rate over the next 5 years (14.0%). This is higher than the likes of DE (projected EPS growth over next 5 years at 10.0%) and AGCO (projected EPS growth over next 5 years at 8.67%).
CNH merged with Fiat Industrial in November 2012, and is expected to trade on a US stock exchange in the third quarter of this year as a new entity. While Fiat Industrial reported a 15% drop in first-quarter profit this year, CNH was hardly to blame. Iveco, another Fiat holding, was credited with bringing profits down, and the company is hopeful that the listing of the new CNH-Fiat merger, combined with potentially better results from Iveco, will bring profits back up, according to Morningstar. Perhaps hedge funds agree.
*Institutional data sourced from Fidelity, accounting data sourced from Google Finance, all other data sourced from Finviz.