When it comes to investing, it can be tempting to simply go with the flow, letting emotion rather than logic be your guide. So market trends can often be misleading, speaking more to crowd hysteria than company fundamentals. The investing majority has the power to inflate or deflate a stock's price, and can skew it far from its fair market value.
Which is why many savvy investors opt for a contrarian tack, taking the behavior of the crowd as a signal to do just the opposite.
For this screen, we started from a pool of stocks that have seen sharp losses during recent sessions. To refine our screen, we used put/call ratios and short interest ratios to take the market's temperature around these stocks.
Purchasing a call option means you anticipate the stock attached to it to increase in value; on the other hand, by buying a put option, you're betting on the stock to fall. So when the number of puts far outnumbers the calls, it could be a sign of irrational pessimism pushing prices down below true stock value.
To further refine our screen, we also looked at short interest. A higher short interest ratio is another signal of extreme pessimism about a stock -- arrived at by dividing short interest by average daily trading volume, a higher ratio indicates that a higher proportion of a company's total float has already been sold short.
If the market is so extremely pessimistic about these oversold stocks, as these ratios indicate, do you think they present a contrarian opportunity for investors willing to take on the risk?
Please keep in mind that these companies have been announcing negative news, and many of them are very risky -- so be careful, and do your own analysis. (Click here to access free, interactive tools to analyze these ideas.)
1. Green Dot Corporation (Nasdaq: GDOT): Green Dot is a prepaid financial services company providing money management solutions to United States consumers. The company recently issued new common stock, which has been a drag on the share price.
Key Stats: Shares shorted increased from 2.97M to 3.09M over the last month (current number of shares shorted represent about 22.43% of the company's float). The company is also seeing a rising number of put options relative to call options -- put/call ratio increased from 0.62 to 2.66 between 03/16/11 and 03/29/11.
2. Mindray Medical International Limited (NYSE: MR): Mindray is a developer, manufacturer and marketer of medical devices worldwide. On Friday, the company announced that its chief financial officer, Ronnie Ede, will step down for personal reasons. The stock has dropped sharply since then.
Key Stats: Shares shorted increased from 16.20M to 16.65M over the last month (current number of shares shorted represent about 19.95% of the company's float). The company is also seeing a rising number of put options relative to call options -- put/call ratio increased from 1.33 to 1.58 between 03/16/11 and 03/29/11.
3. Ebix Inc (Nasdaq: EBIX): Ebix is an international supplier of software and e-commerce solutions to the insurance industry. The stock price has been under pressure since several law firms announced investigations into a recent acquisition made by the company. From Reuters: "According to the EBIX's filings, KPMG LLP resigned as the independent registered public accounting firm for the Company. Just prior to its resignation, KPMG found delegation of authority and what KPMG considered to be inadequate reviews by a person other than the preparer of accounting information, the lack of a formalized contract review process to ensure proper revenue recognition, lack of a complete understanding of the Company's income tax positions and related accounts, inadequate documentation for certain unusual transactions (including the basis for the Company's accounting conclusions), and internal control matters (documented and testable control environment) under the Sarbanes-Oxley Act."
Key Stats: Shares shorted increased from 7.16M to 7.41M over the last month (current number of shares shorted represent about 22.37% of the company's float). The company is also seeing a rising number of put options relative to call options -- put/call ratio increased from 1.08 to 1.33 between 03/16/11 and 03/29/11.
4. Cbeyond (Nasdaq: CBEY): The company provides managed communications and information technology (IT), services to its target market of small businesses in select large metropolitan areas across the United States. TheStreet recently downgraded the stock, citing the company's unimpressive growth in net income, disappointing historical performance and feeble growth in earnings per share.
Key Stats: Shares shorted increased from 4.62M to 4.68M over the last month (current number of shares shorted represent about 16.29% of the company's float). The company is also seeing a rising number of put options relative to call options -- put/call ratio increased from 0.15 to 1.13 between 03/16/11 and 03/29/11.
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.
