Color to the Numbers: Top Contrarian Stocks

Thanks to the Internet, and sites such as Yahoo! Finance and MSN Money, investors have more tools than ever to search for stock ideas by running screens. But screens often return numerous stocks that need to be weeded out, because the numbers don't tell the whole story. Maybe the massive growth at one company was a result of one-time tax adjustments, not core operations, for instance.

Just like the color-by-numbers books that kids doodle on, the picture for stocks pulled from any screen isn't clear until we add the appropriate hues. In this edition of "Color to the Numbers," we'll enlist Motley Fool CAPS for a Foolish look at a screen for contrarian stocks, and we'll use it to examine which stocks merit further investigation and which should be cast aside.

Better a screen than a window
The community of knowledgeable investors who rate stocks in CAPS will help us in our search. In CAPS, investors can see how the collective community rates a company and can compare that rating with the opinions of the very best All-Star stock pickers -- CAPS players with a ranking greater than 80. There are even pitch commentaries and blogs to lend detail to the bull and bear opinions. In all, CAPS gives investors qualitative resources far beyond mere numbers and tables.

So let's take a look at our contrarian screen for today. We'll use the following criteria:

• Market cap of at least $500 million.
• Total debt-to-equity ratio below 0.5.
• Short interest ratio greater than 10.
• Projected five-year earnings-per-share growth rate of at least 15%.
• Forward price-to-earnings ratio of less than 25.

This set of criteria is only one of many ways to search for contrarian stocks, but it should give us a good sampling of stocks that have a solid financial footing yet fall victim to negative sentiment. Of course, there may be very good reasons for the pessimism ... and this is where CAPS can really help.

Opinions with the numbers
Here's a sampling from the list of stocks our screen pulled up today.

Company	Short Interest	EPS Growth Rate	CAPS Rank (Out of 5)
Heartland Payment Systems (NYSE: HPY)	14.7	26.8%	*****
Plexus (Nasdaq: PLXS)	11.4	19.3%	****
Select Comfort (Nasdaq: SCSS)	11.7	18.2%	***
Take-Two Interactive (Nasdaq: TTWO)	14.6	15.5%	***
Texas Roadhouse (Nasdaq: TXRH)	11.3	21.5%	***
United Natural Foods (Nasdaq: UNFI)	11.4	16%	***

Data from Yahoo! Finance. Star rankings from CAPS. All data as of Oct. 3.

At the top of our list of pessimistic picks is Heartland Payment Systems, the sixth-largest credit card processing firm. The Motley Fool Hidden Gems selection is expected to experience dramatic growth in the future, thanks to an aggressive sales push to sign up more merchants to its card-processing system. While much smaller than giants such as First Data, Heartland targets a profitable niche of smaller and midsized merchants that still rack up more than $45 billion per year in transactions.

Short sellers have taken a fancy to Heartland, though, possibly because of ongoing concerns about credit tightening that may affect the larger economy. In addition, investors may be a little queasy over management's shedding of shares lately. While passionate insiders owned 44% of the company in March, management now holds a much smaller -- though still sizeable --  29.5%, following a public offering in September.

Heartland's valuation of 30 times earnings is not too far out of line with those of its peers, however, and the company is expected to grow at almost twice the rate of larger business-services firms. CAPS investors largely believe that the company will rise above the pessimism and outperform the market in the future -- 202 of 208 CAPS voters have registered a bullish opinion on the company.

Gaming software developer Take-Two Interactive is another company earning sour grapes from some investors. While the company has captured millions of fans with hit titles such as the Grand Theft Auto series, an options backdating scandal has turned the company upside down and gutted the management team. But with new management in place, and with titles such as Bioshock coming to market, the company believes it can move past the turmoil and return to growth. CAPS still shows one bear for every six bulls, though, so there's still quite a bit of pessimism out there about the company's future.

Let 65,000 investors be the judge
The collective wisdom of a huge pool of investors can quickly add color to a whitewashed page of numbers. But even with an entire community of qualified opinions acting as the judge, individual investors are still the jury and should perform their own research.

Want to see your favorite screen results run through the wringer in the CAPS community? It's free to tap the knowledge base, and even to give your own opinion, in Motley Fool CAPS.