Generally speaking, most investors prefer to go with the flow when it comes to their trades -- they'll flock to stocks on a rally, and can't unload declining shares fast enough. But then there are the contrarians. Their investment strategy is simple: take a look at how the crowd is trending, and use it as a cue to go the opposite direction.
Here's why: Excessive pessimism around a stock can push its share price below "actual" fair market value. In order to turn a profit off these depressed stocks, contrarians just have to wait for the market to correct, as they assume it will. These undervalued stocks can make for great bargains, if you're willing to take on the risk.
That said, stocks seeing overly bearish sentiment don't necessarily carry a great deal of risk anyway, as most of the negative news may already be factored in.
If investors are already bracing themselves for the worst, gloomy reports won't pack much of a punch. But on the other hand, an unexpected piece of good news can have a major positive impact on a stock's price.
Willing to bet against the crowd? Here's a list of stocks with extremely pessimistic investor sentiment. All of these stocks have recently announced positive news -- how long before the bears reverse their opinions? (Click here to access free, interactive tools to analyze these ideas.)
1. Patterson Companies (Nasdaq: PDCO ) is a distributor of dental, veterinary and rehabilitation supplies and related equipment in North America. Its board of directors recently approved an increase in the quarterly cash dividend to $0.12 per share from $0.10 per share. The board also approved a share repurchase plan of 25 million shares, which replaces the previous share repurchase plan of approximately 4.5 million shares.
Sentiment Analysis: Institutional investors have been dumping PDCO during the current quarter, reducing their holdings by -5.2M shares (representing about 5.41% of the company's float). In addition, options traders seem to be positioning for near-term weakness in the stock. The company's put/call ratio, which measures open interest in options contracts, increased from 0.68 to 0.79 between 03/10/11 and 03/23/11 (a change of 16.18%).
2. Citigroup (NYSE: C ) is one of the most recognized global financial services firm. It services consumers, corporations, governments, and institutions with a variety of financial products and services that range from consumer banking to corporate and investment banking. Citigroup recently announced a 1 to 10 reverse stock split and instituted a $0.01 quarterly dividend. This will now allow a larger number of players to invest in this stock.
Sentiment Analysis: Wall Street Analysts have turned bearish on Citigroup over the last month. The mean rating, sourced from a Reuters survey, changed from 2.32 to 2.43 since 02/21/11 (ratings close to 1 = Strong Buy, while ratings close to 5 = Strong Sell). In addition, options traders seem to be positioning for near-term weakness in the stock. The company's put/call ratio, which measures open interest in options contracts, increased from 0.5 to 0.55 between 03/10/11 and 03/23/11 (a change of 10%).
3. Humana (NYSE: HUM ) offers a range of health and supplemental benefit plans to a variety of consumers, including seniors, military members, and self-employed individuals. Humana was recently awarded a contract that involves health benefits for 3 million active and retired military members and their families. This contract is said to be worth around $23 billion over the next five years.
Sentiment Analysis: During the previous quarter, mutual fund investors were net sellers of 6,700,000 shares (represents about 4.01% of the company's float). In addition, options traders seem to be positioning for near-term weakness in the stock. The company's put/call ratio, which measures open interest in options contracts, increased from 0.85 to 0.93 between 03/10/11 and 03/23/11 (a change of 9.41%). Note: It's worth pointing out that Wall Street analysts are turning bullish on the company's prospects. The mean analyst rating, sourced from Reuters, changed from 2.54 to 2.15 since 02/21/11, a change of -15.35% (Note: Ratings moving closer to 1 = bullish/improving trend, ratings moving closer to 5 = bearish/worsening change)
Interactive Chart: Press Play to compare changes in analyst ratings over the last two years for the stocks mentioned above. Analyst ratings sourced from Zacks Investment Research. Note: The numbers on top of items represent the forward P/E ratio, if available.
Kapitall's Eben Esterhuizen and Alicia Sellitti do not own shares of any companies mentioned.
RSS Headlines
Fool UK