Are you a risk taker? Below, we list 10 companies that may seem to be great values but probably deserve a closer look.
To start with, the stocks on our list have seen an increase in shares shorted month-over-month. This rising interest from short-sellers is considered a bearish indicator -- after all, short-sellers benefit when stock prices fall.
Furthermore, the companys' balance sheets raise some flags. Although these companies saw growth in overall revenue, so did account receivables as a percentage of current assets.
Whenever accounts receivable takes up an increasingly larger portion of revenue, the quality of revenue is considered lower. This is because accounts receivable is an accrual (as opposed to cash), which is subject to management's discretion.
However, such increases in accounts receivable could be due to structural changes in the business, such as a new credit policy or an acquisition. There may be several explanations for these trends, but whenever accounts receivable growth exceeds revenue growth, it flags the investor to take a second look.
Here's a closer look at the terms used above:
Short-sellers: Short-selling is an investment technique that allows an investor to make money when the value of a stock falls. Short-sellers, however, lose money when the share price rises. Because short-selling requires borrowing, an individual or institution must meet several requirements (including background checks) to engage in short-selling. Thus, in general, short-sellers are more sophisticated than the average investor.
In general: When there is an INCREASE in short-selling, short-sellers think the stock will DROP in value. When there is a DECREASE in short-selling, short-sellers think the names will RISE in value
Receivables represent money earned but not yet collected, so when receivables become a larger part of the revenue reported by a company, it indicates lower-quality revenues. This is because there is no guarantee that the money will be paid back in full.
Assets: Any property or holding that has tangible value is listed as an asset. This can include cash, product inventory, accounts receivable, land, equipment, investments, and more.
There is no right or wrong proportion of current (short-term, liquid) assets and long-term assets. However, dwindling cash and current asset levels should be a concern -- it may be a sign of growing illiquidity, which can hamper or even paralyze a company.
Short-sellers don't seem to the trust the revenue quality of these names. Do you? (Click here to access free, interactive tools to analyze these ideas.)
3. Mistras Group
4. Magnum Hunter Resources
6. FX Energy
7. Cimarex Energy
8. Sonoco Products
9. KIT digital
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 Rebecca Lipman and Eben Esterhuizen do not own any of the shares mentioned above. Short data from Yahoo! Finance, accounting data from Google Finance.
Editor's note: A previous version of this article used the incorrect accounts receivable number for IPC The Hospitalist Company. We regret the error.
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