Investing 101: Why Are These 5 Stocks Under $2 Being Dumped by Hedge Funds?

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(Written by Alexander Crawford, list compiled by Eben Esterhuizen. Accounting data sourced from Google Finance, all other data sourced from Finviz.)

When we see a stock that is trading at a very low price such as a few dollars, many of us see a stock that is attractively priced. After all, how much lower can it go?

But this is often a trap, or more accurately a "value trap." Stocks trading at low valuations are usually there for a reason, and it’s a big mistake to look past those reasons when making investments.

One potential source of problems is accounts receivable. This is the portion of revenue that a company has earned but not yet received in cash. These are essentially purchases on credit, and they are less preferable than cash revenue.

When a company’s receivables become a larger part of the revenue reported for the year, it indicates lower quality revenues. This is because there is no guarantee that the money will be paid back in full.

Increases in accounts receivable as a portion of current assets also indicate a negative trend (current assets are the company’s most liquid assets, including receivables, cash, trading securities, and inventory).

For a look at stocks that may demonstrate the value trap, we ran a screen on stocks trading under $2 for those that have seen strong net institutional selling over the current quarter.

These stocks also demonstrate negative accounts receivable trends year-over-year: change in quarterly accounts receivable out-pacing change in quarterly revenue y/y, and quarterly accounts receivable becoming a larger portion of current assets y/y.

Perhaps institutional investors are selling these stocks because of their worsening quality of revenues.

Do you think these stocks are attractively priced, or is there reason to pause? Use this list as a starting-off point for your own analysis.

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List sorted by net institutional shares sold as a percent of share float.

1. China Information Technology, Inc. (CNIT): Provides integrated solutions for the geographic information systems (GIS), digital public security technology (DPST), and the digital hospital information systems markets in the People's Republic of China. Current price at $1.16. Net institutional sales in the current quarter at -4.8M shares, which represents about 25.71% of the company's float of 18.67M shares. Revenue grew by -16.8% during the most recent quarter ($27.89M vs. $33.52M y/y). Accounts receivable grew by 21.36% during the same time period ($123.16M vs. $101.48M y/y). Receivables, as a percentage of current assets, increased from 68.74% to 72.15% during the most recent quarter (comparing 3 months ending 2011-06-30 to 3 months ending 2010-06-30).

2. Network Engines, Inc. (NEI): Provides application platforms and appliance solutions for original equipment manufacturers and independent software vendors worldwide. Current price at $1.27. Net institutional sales in the current quarter at -3.9M shares, which represents about 10.77% of the company's float of 36.22M shares. Revenue grew by 7.36% during the most recent quarter ($66.11M vs. $61.58M y/y). Accounts receivable grew by 32.18% during the same time period ($47.4M vs. $35.86M y/y). Receivables, as a percentage of current assets, increased from 48.29% to 54.56% during the most recent quarter (comparing 3 months ending 2011-06-30 to 3 months ending 2010-06-30).

3. Trident Microsystems Inc. (TRID): Provides semiconductor solutions for the digital home entertainment market. Current price at $0.57. Net institutional sales in the current quarter at -6.3M shares, which represents about 9.29% of the company's float of 67.78M shares. Revenue grew by -59.47% during the most recent quarter ($69.57M vs. $171.65M y/y). Accounts receivable grew by -38.28% during the same time period ($70.22M vs. $113.78M y/y). Receivables, as a percentage of current assets, increased from 42.14% to 50% during the most recent quarter (comparing 3 months ending 2011-06-30 to 3 months ending 2010-06-30).

4. Axcelis Technologies Inc. (ACLS): Designs, manufactures, and services ion implantation, dry strip, and other processing equipment used in the fabrication of semiconductor chips in the United States, Europe, and the Asia Pacific. Current price at $1.39. Net institutional sales in the current quarter at -6.6M shares, which represents about 6.31% of the company's float of 104.67M shares. Revenue grew by 60.45% during the most recent quarter ($93.38M vs. $58.2M y/y). Accounts receivable grew by 69.21% during the same time period ($57.97M vs. $34.26M y/y). Receivables, as a percentage of current assets, increased from 17.22% to 25.06% during the most recent quarter (comparing 3 months ending 2011-06-30 to 3 months ending 2010-06-30).

5. PGT, Inc. (PGTI): Engages in the manufacture and sale of windows and doors. Current price at $1.65. Net institutional sales in the current quarter at -527.1K shares, which represents about 3.49% of the company's float of 15.09M shares. Revenue grew by -7.84% during the most recent quarter ($45.17M vs. $49.01M y/y). Accounts receivable grew by 3.86% during the same time period ($18.57M vs. $17.88M y/y). Receivables, as a percentage of current assets, increased from 30.88% to 43.93% during the most recent quarter (comparing 13 weeks ending 2011-07-02 to 13 weeks ending 2010-07-03).



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

Referenced Stocks: ACLS , CNIT , NEI , PGTI , TRID

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