(List compiled by Eben Esterhuizen, CFA)
This past Wednesday’s European Union summit wasn’t the first attempt to fix the EU debt crisis, and it’s hardly the first hopeful market rally to come with it. Without immediate and clear results, will the enthusiastic response fade away as quickly as it has done before?
The New York Times writes: “The market’s quick embrace of the latest effort to tackle Greece’s mammoth debt burden and restore confidence in the continent’s banks reflected hope that this plan was broader and more robust than previous ones.”
Not Everyone Is Convinced “This is it”
But is it? Skeptics question if the new reform will be sufficient to clear Greece’s debt, and if funds are large enough to hold up the banks. “Moreover, they add, plenty of things will have to go right to ensure its success, and plenty could go wrong to derail it.”
The Greek debt hovers around $340 billion while the package bookmarks “only” $200 billion for the country, most of which is owed to banks. Most importantly, Italy has yet to receive the attention it needs to address its $2 trillion in debt. From there, the problem extends to Portugal, Spain and Ireland.
Spanish and French bond interest rates narrowed only slightly while Italy’s 10-year bond inched from 6% yield down to 5.8% after the eurozone package was announced. The minute adjustments show that investors are slow to accept the new package’s ability to turn things around.
And if the euro zone package fails, how many more rallies founded on hope will the economy have to offer?
If You Expect a Continuation in the Rally
If you expect the market to continue to rally, you might want to look at the names that have been beaten up over the last quarter. By that logic, if everyone starts turning optimistic on the economy’s outlook, these stocks could see some strong rebounds.
To create this list we started with a list of about 200 companies that have seen significant institutional selling during the current quarter. To refine the list, we identified the names that have seen a sharp increase in shares shorted over the last quarter (i.e. short sellers betting these stocks are going to decline)
To further refine the list, we collected data on levered free cash flow, and identified the names that appear to be undervalued relative to enterprise value.
These companies appear to be undervalued relative to enterprise value, which raises an important question: Is this extreme pessimism justified, especially when you consider the rebounding sentiment in the stock market?
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 relative size of institutional selling.
1. Dillard's Inc. (DDS): Operates as an apparel and home furnishing retailer in the United States. Institutional investors have changed holdings by net -5.5M shares during the current quarter, which represents about 18.24% of the company's float of 30.16M shares. Shares shorted have increased from 6.58M to 7.00M over the last month, an increase which represents about 1.39% of the company's float of 30.16M shares. Levered free cash flow at $418.21M vs. enterprise value at $3.49B (implies a LFCF/EV ratio at 11.98%).
2. Comtech Telecommunications Corp. (CMTL): Designs and produces a wide range of telecom systems and services. Institutional investors have changed holdings by net -1.9M shares during the current quarter, which represents about 8.33% of the company's float of 22.81M shares. Shares shorted have increased from 2.09M to 2.48M over the last month, an increase which represents about 1.71% of the company's float of 22.81M shares. Levered free cash flow at $81.65M vs. enterprise value at $431.90M (implies a LFCF/EV ratio at 18.9%).
3. Coinstar Inc. (CSTR): Provides automated retail solutions primarily in the United States, Canada, Puerto Rico, the United Kingdom, and Ireland. Institutional investors have changed holdings by net -1.6M shares during the current quarter, which represents about 5.98% of the company's float of 26.74M shares. Shares shorted have increased from 11.13M to 11.43M over the last month, an increase which represents about 1.12% of the company's float of 26.74M shares. Levered free cash flow at $219.51M vs. enterprise value at $1.79B (implies a LFCF/EV ratio at 12.26%)