Color to the Numbers: Top Contrarian Stocks

Thanks to the Internet and sites such as Yahoo! and MSN Money, investors have more tools than ever to search for stock ideas, by running screens of stock databases. 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 and not core operations. Or maybe the screen didn't reflect the latest announcement that a dividend was canceled.

So just like the color-by-numbers books that kids doodle on, the picture for stocks from any screen isn't clear until the appropriate color gets added to the page. In this edition of "Color to the Numbers," we'll enlist Motley Fool CAPS to take a Foolish look at a screen for contrarian stocks -- companies with underlying value that investors generally view negatively -- to see which stocks may be worth investigating further, and which should be cast aside.

Better a screen than a window
The community of knowledgeable investors rating stocks in CAPS will help us in our search for contrarian stocks. By pulling up a quote on a particular stock in CAPS, investors can see at a glance how the collective community rates a company today. Additionally, investors can see how the very best All-Star stock pickers -- CAPS players with a ranking above 80 -- rate a given stock. There are even pitch commentaries and blogs that give details behind bull and bear opinions. This gives investors much more qualitative resources than just numbers and tables.

So let's take a look at our contrarian screen for today and a handful of the top stock candidates it returned. To run this screen, 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%.
• A 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 should give us a good sampling of stocks that have a solid financial footing yet fall victim to negative sentiment. The debt-to-equity ratio, forward P/E, and EPS growth criteria give us companies with a decent balance sheet and good future prospects at a reasonable value. A high short interest ratio -- the number of days of average trading volume necessary to equal the number of shares held short -- highlights stocks with a large contingent of pessimistic investors. But there may be high short interest in a company for very good reasons. (Hint: 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.

At the top of our list, sporting a massive short interest ratio of 60.8, is construction strapping company Simpson Manufacturing. For those unfamiliar with the products, odds are that your home or apartment has its walls and ceiling structure secured by Simpson's "Strong Tie" metal straps. Of course, these days, investors frantically scurry clear of anything tied to the housing market faster than cockroaches in a sunroom -- hence the high negative sentiment surrounding the company.

But many CAPS investors cite the years-long leading position the company has enjoyed in its niche of building products as a reason to like the stock. Strong management and high insider ownership are also reasons that Simpson will weather the housing storm, according to CAPS investors bullish on the company. With a solid track record and a current P/E ratio of less than 20, this beaten-down stock has a good chance of generating above-market returns, according to 241 of the 250 CAPS players giving an opinion on the company.

Casual-dining restaurant operator Cheesecake Factory is another out-of-favor stock that bearish investors have been nibbling at lately -- even with a 19% compound annual growth rate (CAGR) of revenues over the last five years and a projected EPS growth rate for the next five years of 18.6%. The CAPS community holds a mix of opinions on the company. Bears cite the upscale restaurant model as being more susceptible to economic dips, as consumers will be more discretionary with their cash in tight times -- maybe opting instead for a cheaper outing to McDonalds or Yum! Brands' Taco Bell. But 379 CAPS bulls see a beaten-down serial cash generator that is discounted from its projected cash flow.

Electronic bill-paying king Checkfree makes the bottom of our list this week, with disagreement among investors about just how profitable the future of e-banking and bill paying will be. Of the 144 CAPS players ranking the stock, 133 are bullish, believing that online banking is sure to grow at a good clip in the long term, but a few bears wonder just how profitable the back-end processing of transactions can be.

Let 50,000 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 give your own opinion in Motley Fool CAPS.

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Fool contributor Dave Mock does his best to color within the lines, but he reserves his right to artistic expression. He owns no shares of companies mentioned here. Dave is the author of The Qualcomm Equation. The Fool's disclosure policy doesn't see color or the wart on your nose.