Doom, Gloom, and Boom: 6 Stocks Dragged Down by Excessive Pessimism

Warren Buffett once said, "Be greedy when others are fearful" -- an adage to most, but words to live by for the contrarian. The contrarian investor is always on the prowl for the companies that few others would touch with a 10-foot pole -- in other words, they love the stocks you love to hate.

In the world of investing, extreme pessimism about a stock can sometimes indicate a good time to buy. Overly bearish investors often push a stock price below reasonable levels, offering an attractive entry point if you're willing to take the risk.

That said, it may not even be so risky, when you consider that most of the bad news might already be priced into a stock's price -- investors expect the company to report bad news, blunting the impact of negative events (and reducing the stock's risk). By contrast, if no one's expecting any good news to come out of the company anyway, a positive surprise can put a rocket on the share price.

The following is a list of stocks seeing extreme pessimism from options traders, institutional investors, and short-sellers. Does this overwhelming consensus provide an opportunity for contrarians? Click here to use interactive tools to analyze these ideas.

Our screen is based on the following:

1. Options Traders: When options traders are bullish on a stock, they buy Call options. When they are bearish, they buy Put options. In other words, looking at the open interest of Put to Call options can give you a clue what options traders are thinking. The higher the Put/Call ratio, the more bearish options traders are on a company's prospects. All of the stocks in this list have Put/Call ratios above 1.0 (i.e., bigger put option open interest vs. call option open interest).

2. Institutional Investors: Considering that institutional investors have smart people analyzing investing ideas all day long, it's probably a red flag when they start dumping a stock. That said, institutional investors don't always get it right. All of the stocks in our list have seen significant 3 month decreases in institutional ownership.

3. Short-Sellers: Short-sellers make money by borrowing shares from other investors, and selling those shares in the open market. Because these shares are borrowed, short-sellers must eventually buy these shares back to return them to their original owners. Because of this "reverse" transaction, short-sellers only make money if a stock declines in value. All of the stocks in our list have more than 20% of their shares shorted, meaning that a large group of short-sellers think the stocks will decline.

Here is the output of the screen, sorted by the percentage change in institutional ownership over the past three months.

Interactive chart: Compare analyst ratings and annual performance of all stocks mentioned above ...

Kapitall's Eben Esterhuizen, CFA, does not own shares of any companies mentioned.