Roughly $75 billion has been withdrawn from U.S. equities in the trailing five months, eclipsing the $73 billion outflows in the five months following the Lehman Brothers collapse, reports Bloomberg. Investors who continue to abandon the markets are adding to the "$2.1 trillion rout in American stocks."

It seems retail investors are more bearish on stocks now than they were after the Lehman bankruptcy. Severe pessimism has taken hold. Bears argue that there is "no end in sight to the decline" that began in August. Investors see the market's unforgiving volatility and record high correlation to the political stage, and many prefer to retreat.

In contrast, bulls are finding a silver lining in what they see as an opportunity-rich market. They are acting like contrarian investors, going against the crowd and searching for opportunity in unpopular positions.

One common mind-set of contrarians is that excessive sentiment (either bearish or bullish) can lead to a mispriced stock, which becomes an investing opportunity as the market corrects itself. That's not to say that pinpointing "excessive" sentiment is an easy task.

"Bulls say the retreat by individuals has been a reason to buy since the bull market began in March 2009 and withdrawals mean money is available to buy stocks in the future," according to Bloomberg.

Looking for contrarian ideas? We created a list using the contrarian mind-set.

We started with a universe of about 200 stocks that have seen significant institutional selling during the current quarter,  then identified the most undervalued stocks relative to free cash flow. To further refine the list, we collected data on short trends and identified the companies that have seen a significant decrease in shares shorted over the last month, a bullish change.

Short-sellers think most of the bad news is priced into these undervalued stocks that have been dumped by institutional investors -- do you agree?

List sorted alphabetically. (Click here to access free, interactive tools to analyze these ideas.)

1. Cephalon (Nasdaq: CEPH): Engages in the discovery, development, and commercialization of products for central nervous system, inflammatory disease, pain, and oncology therapeutic areas. During the current quarter, institutional investors have changed their holdings by -13.2M shares, which represents about 18.67% of the company's float of 70.71M shares. Shares shorted have decreased from 11.39M to 9.92M over the last month, a decrease which represents about 2.08% of the company's float of 70.71M shares. Levered free cash flow at $675.44M vs. enterprise value at $6.40B (implies a LFCF/EV ratio at 10.55%).

2. Dillard's (NYSE: DDS): Operates as an apparel and home furnishing retailer in the United States. During the current quarter, institutional investors have changed their holdings by -4.0M shares, which represents about 13.67% of the company's float of 29.26M shares. Shares shorted have decreased from 7.55M to 7.03M over the last month, a decrease which represents about 1.78% of the company's float of 29.26M shares. Levered free cash flow at $418.21M vs. enterprise value at $3.24B (implies a LFCF/EV ratio at 12.91%).

3. Dex One (Nasdaq: DEXO): Operates as a marketing solutions company. During the current quarter, institutional investors have changed their holdings by -4.6M shares, which represents about 11.67% of the company's float of 39.42M shares. Shares shorted have decreased from 5.25M to 4.73M over the last month, a decrease which represents about 1.32% of the company's float of 39.42M shares. Levered free cash flow at $369.10M vs. enterprise value at $2.49B (implies a LFCF/EV ratio at 14.82%).

4. Lexmark International (NYSE: LXK): Develops, manufactures, and supplies printing and imaging solutions for offices. During the current quarter, institutional investors have changed their holdings by -8.5M shares, which represents about 10.85% of the company's float of 78.36M shares. Shares shorted have decreased from 8.43M to 6.82M over the last month, a decrease which represents about 2.05% of the company's float of 78.36M shares. Levered free cash flow at $277.29M vs. enterprise value at $1.84B (implies a LFCF/EV ratio at 15.07%).

5. Medifast (NYSE: MED): Engages in the production, distribution, and sale of weight management and disease management products, and other consumable health and diet products in the United States. During the current quarter, institutional investors have changed their holdings by -918.8K shares, which represents about 7.82% of the company's float of 11.75M shares. Shares shorted have decreased from 4.20M to 3.90M over the last month, a decrease which represents about 2.55% of the company's float of 11.75M shares. Levered free cash flow at $24.47M vs. enterprise value at $203.88M (implies a LFCF/EV ratio at 12.%).

6. China Valves Technology (Nasdaq: CVVT): Engages in developing, manufacturing, and selling low, medium, and high-pressure metal valves for customers in the electricity, petroleum, chemical, water, gas, nuclear power station, and metal industries in China. During the current quarter, institutional investors have changed their holdings by -1.6M shares, which represents about 7.79% of the company's float of 20.53M shares. Shares shorted have decreased from 2.40M to 2.19M over the last month, a decrease which represents about 1.02% of the company's float of 20.53M shares. Levered free cash flow at $9.04M vs. enterprise value at $51.62M (implies a LFCF/EV ratio at 17.51%).

7. ReneSola (NYSE: SOL): Engages in the manufacture and sale of solar wafers and solar power products. During the current quarter, institutional investors have changed their holdings by -3.6M shares, which represents about 5.94% of the company's float of 60.63M shares. Shares shorted have decreased from 8.66M to 7.52M over the last month, a decrease which represents about 1.88% of the company's float of 60.63M shares. Levered free cash flow at $124.51M vs. enterprise value at $576.41M (implies a LFCF/EV ratio at 21.6%).

List compiled by Eben Esterhuizen, CFA.

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.


Kapitall's Becca Lipman and Eben Esterhuizen do not own any of the shares mentioned above. Institutional data sourced from Fidelity. Levered Free Cash Flow data sourced from Yahoo! Finance.