Against the Herd: If Everyone Else is Selling Stocks, Should You?

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(Written by Rebecca Lipman. List compiled by Eben Esterhuizen, CFA)

Total investor outflows have reached $249 billion from stock mutual funds since January 2007 – an estimated $60 billion from this year alone. The average stock mutual fund shed 17.4% in the third quarter, vs. a 13.9% loss for the Standard and Poor’s 500-stock index.

These figures come from John Waggoner of USA Today who says, “if you can’t understand why small investors are getting out of the stock market, you haven’t been watching it lately.”

He has a point. Investors are becoming increasingly discontent to stand on the sidelines and watch their funds disappear. They are plagued with uncertainty and lack of confidence in the markets and global politics.

In the past years, and especially the last few months, they have watched the market prove itself to be more unstable and volatile than thought possible, all the while coming to “realizations” that the investing game isn’t being played the way it used to be.

This is all bad news for most investors. But others, namely contrarian investors, feel this sentiment indicates opportunity banging on their doors.

“Wall Street has long made a practice of using the small investor as a contrary indicator — that is, when investors are most pessimistic, it’s time to jump back into the market.

“Supposedly, Joseph Kennedy dodged the crash of 1929 because he sold his stocks when a shoeshine boy gave him a stock tip. Kennedy figured that if shoeshine boys were buying stocks, there was no one left to put more money into the market and push it higher.”

For those that subscribe to contrarian sentiment the market appears to give off flashing “buy” signals. After all, if pessimism in the market place has been fully or over priced in, as some contrarians believe, then the market is providing a wealth of opportunity to buy on a discount.

Of course, that all depends on what you think the market will do next. And it should be noted that contrarian investors are no better than others in determining the length or bottoming point of the bear market.

So, how can you spot contrarian ideas that have positive long-term prospects?

To create this list, we started with a universe of about 180 stocks that have seen a sharp increase in the number of put options relative to call options over the last two weeks (i.e. rising Put/Call ratios, a signal of bearish options market sentiment)

From this universe, we collected data on insider transactions, and identified a list of companies from the starting universe that have seen significant buying from inside executives.

Options traders appear to be extremely bearish on these names, but insiders think there’s long-term bullishness that must still be priced in–which side are you on?

Analyze These Ideas (Tools Will Open In A New Window)

1. Access a thorough description of all companies mentioned
2. Compare analyst ratings for all stocks mentioned below
3. Visualize annual returns for all stocks mentioned

List sorted by change in Put/Call ratio.

1. Idenix Pharmaceuticals Inc. (IDIX): Engages in the discovery and development of drugs for the treatment of human viral and other infectious diseases in the United States and Europe. Put/Call ratio changed from 0.31 to 1.64 between 09/22/11 to 10/05/11. Over the last six months, insiders were net buyers of 38,076 shares, which represents about 0.06% of the company's 60.35M share float.

2. Rex Energy Corporation (REXX): Operates as an independent oil and gas company in the Appalachian, Illinois, and Denver-Julesburg Basins. Put/Call ratio changed from 0.28 to 1.26 between 09/22/11 to 10/05/11. Over the last six months, insiders were net buyers of 77,325 shares, which represents about 0.22% of the company's 35.04M share float.

3. PharMerica Corporation (PMC): Operates as an institutional pharmacy services company in the United States. Put/Call ratio changed from 0.36 to 1.2 between 09/22/11 to 10/05/11. Over the last six months, insiders were net buyers of 17,318 shares, which represents about 0.06% of the company's 27.16M share float.

4. Jefferies Group Inc. (JEF): Operates as a securities and investment banking company in the Americas, Europe, and Asia. Put/Call ratio changed from 1.06 to 3.13 between 09/22/11 to 10/05/11. Over the last six months, insiders were net buyers of 766,000 shares, which represents about 0.36% of the company's 215.77M share float.

5. Akorn, Inc. (AKRX): Engages in the manufacture and marketing of diagnostic and therapeutic pharmaceutical products, hospital drugs, and injectable pharmaceuticals in the United States and internationally. Put/Call ratio changed from 0.29 to 0.65 between 09/22/11 to 10/05/11. Over the last six months, insiders were net buyers of 33,500 shares, which represents about 0.05% of the company's 67.56M share float.

6. Six Flags Entertainment Corp. (SIX): Operates regional theme, water, and zoological parks in North America. Put/Call ratio changed from 0.94 to 1.82 between 09/22/11 to 10/05/11. Over the last six months, insiders were net buyers of 481,660 shares, which represents about 2.02% of the company's 23.83M share float.

7. MannKind Corp. (MNKD): Focuses on the discovery, development, and commercialization of therapeutic products for diabetes and cancer. Put/Call ratio changed from 0.55 to 0.68 between 09/22/11 to 10/05/11. Over the last six months, insiders were net buyers of 3,478,136 shares, which represents about 4.39% of the company's 79.31M share float.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas , Stocks


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