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The following is a list of undervalued stocks, based on the Price to Free Cash Flow (P/FCF) ratio. All stocks mentioned below have a Price to Free Cash Flow (P/FCF) ratio 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 decreasing short interest over the last three months (between 10/29/10 - 1/31/11).

Short sellers seem to think the upside potential outweighs the downside potential of these names--what do you think? Full details below.

Short trends data sourced from AOL Money, short float and performance data sourced from Finviz.

Interactive Chart: Press Play to compare changes in analyst ratings over the last two years for the top six 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.

1. Mitsubishi UFJ Financial Group, Inc. (NYSE:MTU): Money Center Banks Industry. Market cap of $78.11B. P/FCF at 4.17. Shares shorted have decreased from 3.3M to 1.19M (-63.94% change). Short float at 0.02%, which implies a short ratio of 0.73 days. The stock has gained 10.40% over the last year.

2. China Life Insurance Co. Ltd. (NYSE:LFC): Life Insurance Industry. Market cap of $106.92B. P/FCF at 3.82. Shares shorted have decreased from 1.79M to 1.03M (-42.46% change). Short float at 0.17%, which implies a short ratio of 2.12 days. The stock has lost -13.10% over the last year.

3. Domtar Corporation (NYSE:UFS): Paper & Paper Products Industry. Market cap of $3.88B. P/FCF at 3.87. Shares shorted have decreased from 3.06M to 2.06M (-32.68% change). Short float at 4.96%, which implies a short ratio of 3.64 days. The stock has gained 75.06% over the last year.

4. Manulife Financial Corporation (NYSE:MFC): Life Insurance Industry. Market cap of $33.58B. P/FCF at 2.93. Shares shorted have decreased from 14.34M to 9.77M (-31.87% change). Short float at 0.55%, which implies a short ratio of 3.76 days. The stock has gained 4.83% over the last year.

5. Quanex Building Products Corporation (NYSE:NX): General Building Materials Industry. Market cap of $743.02M. P/FCF at 4.6. Shares shorted have decreased from 1.88M to 1.33M (-29.26% change). Short float at 3.61%, which implies a short ratio of 3.9 days. The stock has gained 18.93% over the last year.

6. ITT Educational Services Inc. (NYSE:ESI): Education & Training Services Industry. Market cap of $2.17B. P/FCF at 4.14. Shares shorted have decreased from 7.83M to 5.86M (-25.16% change). Short float at 19.58%, which implies a short ratio of 6.98 days. The stock has lost -33.40% over the last year.

7. MCG Capital Corporation (NASDAQ:MCGC)
: Asset Management Industry. Market cap of $552.33M. P/FCF at 4.28. Shares shorted have decreased from 2.42M to 1.86M (-23.14% change). Short float at 2.51%, which implies a short ratio of 5.15 days. The stock has gained 60.44% over the last year.

8. Delphi Financial Group, Inc. (NYSE:DFG): Life Insurance Industry. Market cap of $1.60B. P/FCF at 4.5. Shares shorted have decreased from 2.8M to 2.16M (-22.86% change). Short float at 4.53%, which implies a short ratio of 12.89 days. The stock has gained 41.32% over the last year.

9. Excel Maritime Carriers, Ltd. (NYSE:EXM): Shipping Industry. Market cap of $402.80M. P/FCF at 4.38. Shares shorted have decreased from 2.57M to 1.99M (-22.57% change). Short float at 4.72%, which implies a short ratio of 2.54 days. The stock has lost -10.00% over the last year.

10. Cloud Peak Energy Inc. (NYSE:CLD):
Industrial Metals & Minerals Industry. Market cap of $715.86M. P/FCF at 2.92. Shares shorted have decreased from 3.36M to 2.63M (-21.73% change). Short float at 8.47%, which implies a short ratio of 2 days. The stock has gained 45.21% over the last year.

11. NRG Energy, Inc. (NYSE:NRG): Electric Utilities Industry. Market cap of $5.16B. P/FCF at 4. Shares shorted have decreased from 12.19M to 9.63M (-21.00% change). Short float at 3.91%, which implies a short ratio of 3.42 days. The stock has lost -7.57% over the last year.

12. MB Financial Inc. (NASDAQ:MBFI): Regional Bank. Market cap of $1.14B. P/FCF at 4.82. Shares shorted have decreased from 3.7M to 3.02M (-18.38% change). Short float at 5.89%, which implies a short ratio of 10.46 days. The stock has gained 5.04% over the last year.

13. Aircastle LTD (NYSE:AYR): Rental & Leasing Services Industry. Market cap of $955.23M. P/FCF at 2.88. Shares shorted have decreased from 1.38M to 1.13M (-18.12% change). Short float at 1.47%, which implies a short ratio of 2.69 days. The stock has gained 27.87% over the last year.

14. Anworth Mortgage Asset Corporation (NYSE:ANH): REIT. Market cap of $837.42M. P/FCF at 1.64. Shares shorted have decreased from 6.07M to 5.08M (-16.31% change). Short float at 4.26%, which implies a short ratio of 4.45 days. The stock has gained 12.14% over the last year.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Source: 14 Undervalued Stocks With Decreasing Short Interest