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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 40 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. In a time when the market is rallying, these losing streaks become particularly noteworthy.

Specifically, 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.

The List

We last ran this screen on April 16 and limited our search to small caps. Since publishing, the average return of the 5 stocks on that list is 3.49%, led by AK steel Holding Corporation (NYSE:AKS) (14%) and dragged down by Walter Energy (NYSE:WLT) (-18%). Interestingly, the SA commentary signaled out Walter as a name that had more downside to go, but a potential long term candidate. We therefore felt that this list, which marries short term pessimism with long term potential, as well as technical and fundamental considerations, is worth revisiting.

Here are the companies that made our updated list. Do you think hedge funds are calling it right on these names? Use this list as a starting point for your own analysis.

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

1. Exide Technologies (XIDE): Engages in the manufacture and supply of lead-acid batteries for the transportation and industrial energy applications.

  • Market cap at $69.31M, most recent closing price at $0.87.
  • Float short at 13.29%. Exide's 13.29% short float is equivalent to 4.93 days of average trading volume, much higher than competitors EnerSys (NYSE:ENS) (short float at 5.10%) and Johnson Controls (short float at 1.6%).
  • RSI (14) at 35.7. According to fellow Seeking Alpha contributor Inefficient Market, "There is still a lot of uncertainty surrounding Exide, but the problems do not seem unfixable." He suggests that the recent selloffs after bad news have not been entirely justifiable, going as far to suggest "investors sold and asked questions later."
  • Net institutional purchases in the current quarter at 3.5M shares, which represents about 5.08% of the company's float of 68.92M shares. Top holders are FMR, LLC (9.33%), Jeffrey Gendell (8.55%) and The Vanguard Group, Inc. (5.09%).
  • The stock's average daily alpha vs. the S&P500 index stands at -1.67% (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 3 days (i.e. a win streak / losing streak ratio of 0.5).

Of note: Exide has reported troubling account receivable trends. Revenue grew by 2.66% during the most recent quarter ($804.88M vs. $784.05M y/y). Accounts receivable grew by 13.14% during the same time period ($553.8M vs. $489.47M y/y). Receivables, as a percentage of current assets, increased from 42.19% to 45.44% during the most recent quarter (comparing 3 months ending 2012-12-31 to 3 months ending 2011-12-31).

The company has reported strong earnings growth over the last year, with EPS growing by 112.55%, higher than competitors like EnerSys (EPS growth over the last year at 29.09%) and Johnson Controls Inc. (EPS growth over the last year at -13.31%). However, it has a lower than average projected earnings growth rate over the next 5 years (10.0%). This is significantly below the analyst projections for EnerSys (projected EPS growth over next 5 years at 13.0%) and Magna International, Inc. (projected EPS growth over next 5 years at 12.10%).

2. EMCORE Corporation (NASDAQ:EMKR): Provides compound semiconductor-based products for the broadband, fiber optics, space, and solar power markets.

  • Market cap at $97.77M, most recent closing price at $3.66.
  • Float short at 10.22%. Short sellers are becoming increasingly pessimistic: Shares shorted have increased from 2.23M to 2.53M over the last month, an increase which represents about 1.6% of the company's float of 18.72M shares. Days to cover ratio at 9.95 days.
  • RSI (14) at 32.82. A lot of the recent downside and selloffs can be attributed to earnings. On May 9 EMKR reported disappointing earnings. Consolidated revenue for the second quarter ended March 31, 2013 was $42.3 million, which represents an 11.9% increase compared to the prior year but a 14.3% decrease from the previous quarter.
  • Net institutional purchases in the current quarter at 2.0M shares, which represents about 10.68% of the company's float of 18.72M shares. Top holders are Kopp Investment Advisors. Inc. (9.8%), Putnam Investment Management, LLC (3.21%) and Dimensional Fund Advisors LP (2.51%).
  • The stock's average daily alpha vs. the S&P500 index stands at -1.64% (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).

Of note: EMKR has returned -24.30% since 4/19/13, and is one of the worst performing stocks in its industry. The stock is falling behind companies like NeoPhotonics Corporation (NYSE:NPTN) and JDS Uniphase Corporation (NASDAQ:JDSU), which returned 23.45% and 10.0% during the same time period.

EMKR has a higher than average projected earnings growth rate over the next 5 years (20.0%). This is higher than the likes of JDS Uniphase Corporation (projected EPS growth over next 5 years at 9.0%) and Finisar Corp. (projected EPS growth over next 5 years at 7.50%).

3. Synta Pharmaceuticals Corp. (NASDAQ:SNTA): Focuses on the discovery, development, and commercialization of small molecule drug candidates for treating severe medical conditions, including cancer and chronic inflammatory diseases.

  • Market cap at $513.66M, most recent closing price at $7.43.
  • Float short at 26.12%, equivalent to 12.45 days of average trading volume. As an example, this is much higher than Novartis AG (short float at 0.08%, representing 1.32 days of trading volume) and Abbott Laboratories (short float at 0.80%, representing 1.69 days of trading volume).
  • RSI (14) at 37.42. Recent selloffs came after the resignation of their president of research and development, which SA contributor Equity Options Guru argues, "has no bearing on the company's fundamentals or upcoming catalyst, both of which put the company in a nice position."
  • Net institutional purchases in the current quarter at 2.5M shares, which represents about 5.6% of the company's float of 44.65M shares. Top holders are FMR, LLC (10.74%), Jennison Associates LLC (3.5%) and JP Morgan Chase & Company (3.14%)
  • The stock's average daily alpha vs. the S&P500 index stands at -1.39% (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).

Of note: Typical of a biotech stock, Synta is incredibly volatile. With a 52-week range of $3.77 - $11.88, investors still wonder which extreme it will gravitate to from its current $7-$8 range. That will likely depend on data from a lung cancer study presented June 3 at a American Society of Clinical Oncology.

4. Volcano Corporation (NASDAQ:VOLC): Designs, develops, manufactures, and commercializes a suite of intravascular ultrasound (IVUS) and functional measurement (FM) products used in the diagnosis and treatment of vascular and structural heart disease.

  • Market cap at $907M, most recent closing price at $16.63.
  • Float short at 10.45%, equivalent to 5.11 days of average trading volume. As an example, this is much higher than competitors Daxor Corp. (short float at 0.11%, representing 0.68 days of trading volume) and Medtronic, Inc. (short float at 1.10%, representing 2.62 days of trading volume).
  • RSI (14) at 17.67. This may be due to the results of its recent earnigns call in which Volcano revised its outlook for 2013. On a reported basis, it expects revenues in the range of $394.0-$400.0 million compared with prior outlook of $406.0-$412.0 million. According to Zacks, " The weakness in yen and slowdown in PCI volumes were major headwinds in the reported quarter. Moreover, the company expects the challenges to persist through 2013 as reflected in the conservative guidance for the ongoing year.
  • Net institutional purchases in the current quarter at 4.4M shares, which represents about 8.14% of the company's float of 54.06M shares. Top holders are Manning & Napier Advisors Inc (8.71%) and Waddell & Reed Financial Inc. (8.13%) and Janus Capital Management (7.5%)
  • The stock's average daily alpha vs. the S&P500 index stands at -1.39% (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 1 day (i.e. a win streak / losing streak ratio of 0.17).

Of note: VOLC has a higher than average projected earnings growth rate over the next 5 years (18.0%). This is higher than the likes of Medtronic, Inc. (projected EPS growth over next 5 years at 6.91%) and Daxor Corp. (projected EPS growth over next 5 years at 0.0%).

5. Digital Realty Trust Inc. (NYSE:DLR): A real estate investment trust (REIT), through its controlling interest in Digital Realty Trust, L.P., engages in the ownership, acquisition, development, redevelopment, and management of technology-related real estate.

  • Market cap at $8.09B, most recent closing price at $63.03.
    • Float short at 16.14%, equivalent to 11.94 days of average trading volume. As an example, this is much higher than CoreSite RealtyCorporation (short float at 2.78%, representing 4.29 days of trading volume) and First Industrial Realty Trust Inc. (short float at2.89%, representing 3.1 days of trading volume).
    • RSI (14) at 30.98.
  • Net institutional purchases in the current quarter at 13.9M shares, which represents about 10.86% of the company's float of 128.04M shares. Top holders are the Vanguard Group !11.69%) and Cohen & Steers Inc. (8.53%)
  • Earlier this month hedge fund manager Jon Jacobson of Highfields Capital Management LP announced his short position on DLR, causing share price to drop. Seeking Alpha contributors Brad Thomas and Dividend Growth Investor seem to think he's dead wrong to do so, making this stock an interesting contrarian play. Both reference DLR's competitive advantage and room for growth, in addition to an attractive dividend.
  • The stock's average daily alpha vs. the S&P500 index stands at -1.12% (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 1 day (i.e. a win streak / losing streak ratio of 0.17).

Of note: DLR has returned -14.56% since 4/19/13, and is one of the worst performing stocks in its industry. The stock is falling behind companies like Brandywine Realty Trust (NYSE:BDN) and DuPont Fabros Technology, Inc. (NYSE:DFT), which returned 5.83% and 4.96% during the same time period.

*Institutional data sourced from Fidelity, price data from Yahoo! Finance, all other data sourced from Finviz

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