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The following is a list of undervalued stocks, with Price to Free Cash Flow (P/FCF) ratios below 5. In other words, free cash flows makes up more than 20% of each company's market capitalization. Additionally, all of these stocks have seen a significant decrease in shares shorted between 10/15/2010 - 1/14/2011.

Short sellers seem to think the upside potential outweighs the downside potential of these names, as a result this list might offer an interesting starting point to a value-oriented investor--what do you think? Full details below.

Short trends data sourced from AOL Money and P/FCF ratios sourced from Finviz.

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. Note: The numbers on top of items represent the forward P/E ratio, if available.

The list has been sorted by the change in shares shorted over the last three months. (A reminder: All trends described occur between 10/15/2010 - 1/14/2011)

1. Cloud Peak Energy Inc. (CLD): Industrial Metals & Minerals Industry. Market cap of $750.17M.

P/FCF ratio at 3.06. Shorted shares decreased from 2.97M to 1.82M over the last three months (-39% change). Short float at 5.85%, which implies a short ratio of 1.41 days. The stock has gained 68.77% over the last year.

Other Highlights:

- Institutional and mutual fund investors have been net purchasers of the company's shares over the last two quarters, suggesting that the smart money thinks there's more upside to the stock. Institutional investors have been net buyers of 4.9M shares during the most recent quarter, vs. 1.8M net shares purchased in the previous quarter. Mutual fund investors have also been optimistic on the stock. They were net buyers of 3.5M shares during the most recent quarter, vs. 456.5K net shares purchased in the previous quarter.

- Insiders appear to be optimistic on the outlook for the company. On a net basis, they've purchased an average of 4,450 shares per year (over last 2 years).

2. Domtar Corporation (UFS): Paper & Paper Products Industry. Market cap of $3.83B.

P/FCF ratio at 3.81. Shorted shares decreased from 3.58M to 2.64M over the last three months (-26% change). Short float at 6.36%, which implies a short ratio of 4.79 days. The stock has gained 84.29% over the last year.

Other Highlights:

- The company's capital spending accelerated by 6.25% over the last five years, much faster than the industry average of -2.74%. At least theoretically, this makes them more competitive over the coming years, since their operational assets are more up-to-date.

- The company has demonstrated rapid cash flow growth over the last five years, which may lower their risk going forward. Five year average cash flow growth at 52.56%, much higher than the industry average at 1.78%.

- Over the last year, the company has proven itself to be more profitable than its industry competitors. Trailing twelve month (TTM) gross margin at 24.5%, higher than the industry average at 21.1%. TTM EBITD margin at 18.72% vs. industry average at 15.84%, while TTM operating margin came in at 11.97%, higher than the industry average at 7.28%. The company also outperformed with its pretax margin, reporting a ratio of 7.66%, higher than the industry average at 4.22%.

- Judging by trailing twelve month (TTM) ratios like Return on Equity ((ROE)), Return on Assets (ROA) and Return on Invested Capital (ROI), it's clear that the company's management is doing an excellent job. TTM ROE at 21.22%, higher than the industry average at 10.99%, TTM ROA at 9.84% vs. the industry average at 2.6%, and TTM ROI at 14.98%, higher than the industry average at 10.18%. The company also outperformed its industry competitors in terms of the TTM Return on Sales ratio (10.34% vs. the industry average at 3.28%).

- The company has low debt and great liquidity, which significantly reduces its risk over the coming months. During the most recent quarter, the total Debt/Assets ratio stood at 14.11% vs. the industry average at 29.56%. Total Debt/Equity came in at 26.55%, lower than the industry average at 142.25%. The company also appears to be more liquid than its competitors. The TTM Current Ratio stands at 2.77, higher than the industry average at 1.69. (Note: All ratios based on the most recent quarter, annualized)

3. Micron Technology Inc. (MU): Semiconductor Industry. Market cap of $11.26B.

P/FCF ratio at 4.53. Shorted shares decreased from 92.16M to 74.07M over the last three months (-20% change). Short float at 8%, which implies a short ratio of 2.09 days. The stock has gained 26.71% over the last year.

Other Highlights:

- When comparing the company's price relative to earnings, it's clearly undervalued. The P/E ratio, based on the most recent quarter's earnings, stands at 18.82, vs. the industry average at 14.78, while the P/E ratio, based on trailing twelve month earnings, stands at 6.34, which is lower than the industry average at 21.99. The company also appears to be undervalued relative to projected earnings growth. PEG ratio at 0.54, vs. an industry average at 1.62.

- The company also appears to be undervalued relative to book value. Price/Book ratio at 1.47, much lower than the industry average of 4.88.

- The company has demonstrated rapid cash flow growth over the last five years, which may lower their risk going forward. Five year average cash flow growth at 21.07%, much higher than the industry average at 8.91%.

4. American International Group, Inc. (AIG): Property & Casualty Insurance Industry. Market cap of $28.35B.

P/FCF ratio at 1.45. Shorted shares decreased from 20.12M to 16.36M over the last three months (-19% change). Short float at 13.01%, which implies a short ratio of 2.26 days. The stock has gained 127.14% over the last year.

Other Highlights:

- The company's capital spending accelerated by 15.81% over the last five years, much faster than the industry average of 2.22%. At least theoretically, this makes them more competitive over the coming years, since their operational assets are more up-to-date.

- Institutional and mutual fund investors have been net purchasers of the company's shares over the last two quarters, suggesting that the smart money thinks there's more upside to the stock. Institutional investors have been net buyers of 3.1M shares during the most recent quarter, vs. 19.3M net shares purchased in the previous quarter. Mutual fund investors have also been optimistic on the stock. They were net buyers of 8.8M shares during the most recent quarter, vs. 2.0M net shares purchased in the previous quarter.

- Insiders appear to be optimistic on the outlook for the company. On a net basis, they've purchased an average of 3,762,161 shares per year (over last 2 years).

5. American Equity Investment Life Holding Co. (AEL): Life Insurance Industry. Market cap of $777.83M.

P/FCF ratio at 2.02. Shorted shares decreased from 6.82M to 5.99M over the last three months (-12% change). Short float at 10.73%, which implies a short ratio of 10.74 days. The stock has gained 93.86% over the last year.

Other Highlights:

- The company has demonstrated rapid cash flow growth over the last five years, which may lower their risk going forward. Five year average cash flow growth at 19.33%, much higher than the industry average at 4.15%.

- The company appears to have a very efficient workforce, which should help manage cost pressures going forward. Trailing twelve month Income/Employee stands at $194,211, higher than the industry average at $157,887. The company also outperformed on the Revenue/Employee metric ($3,305,660 vs. the industry average at $1,360,640).

- Institutional and mutual fund investors have been net purchasers of the company's shares over the last two quarters, suggesting that the smart money thinks there's more upside to the stock. Institutional investors have been net buyers of 7.0M shares during the most recent quarter, vs. 2.4M net shares purchased in the previous quarter. Mutual fund investors have also been optimistic on the stock. They were net buyers of 1.6M shares during the most recent quarter, vs. 3.3M net shares purchased in the previous quarter.

- Insiders appear to be optimistic on the outlook for the company. On a net basis, they've purchased an average of 12,490 shares per year (over last 2 years).

Source: 5 Deeply Undervalued Stocks Seeing Short Covering