Funds Are Bullish On These 3 Shorted Stocks With Strong Sales Trends

For many investors, companies with significant increases in shares shorted have a negative outlook and should be avoided, but these "smart money"-favored stocks with bearish short trends may deserve a second look. [More Lists:  3 Undervalued Stocks Near Ex-Dividend Dates]

To start our stock list, we began with a universe of stocks with significant increases in shares shorted month-over-month as a percent of share float greater than 1%. This indicates that short sellers are now more bearish on these names than they were last month.

Next, we looked for any suggestions of bullish sentiment from "smart money" investors. To do this, we screened for significant net institutional purchases over the last quarter representing at least 5% of share float. This indicates that institutional investors such as hedge fund managers and mutual fund managers expect these names to outperform into the future.

Finally, we focused on companies with strong sales trends, specifically those with stocks exhibiting faster growth in revenue than inventory year-over-year. Inventory is the portion of goods not yet sold, so faster growth in revenue than inventory is considered an encouraging sign.

The List

For an ‪interactive version of this chart, click on the image below. Analyst ratings sourced from Zacks Investment Research.‬

Do you find these shorted stocks as promising as institutional investors? Use this list as a starting point for your analysis.

 

1. Carriage Services Inc. (CSV): Provides death care services and merchandise in the United States.
  • Market cap at $310.91M, most recent closing price at $17.13.
  • Shares shorted have increased from 507.54K to 758.14K over the last month, an increase which represents about 1.61% of the company's float of 15.60M shares. Days to cover ratio at 3.87 days.
  • Net institutional purchases in the current quarter at 1.1M shares, which represents about 7.05% of the company's float of 15.60M shares. The 2 top holders of the stock are FMR LLC and Dimensional Fund Advisors LP.
  • Revenue grew by 11.53% during the most recent quarter ($53.3M vs. $47.79M y/y). Inventory grew by -61.74% during the same time period ($5.13M vs. $13.41M y/y). Inventory, as a percentage of current assets, decreased from 40.42% to 15.48% during the most recent quarter (comparing 3 months ending 2012-12-31 to 3 months ending 2011-12-31).

Why Shorts May be Bearish

Taking a look at the market, Carriage Services appears to have difficulty gaining upside momentum – a notable issue in this bull market. The company's average daily alpha versus the S&P 500 index stands at -1.15% (measured close to close, over the last month). During this period, the longest losing streak lasted 5 days (i.e. the stock's daily returns underperformed the S&P 500 for 5 consecutive days). The longest winning streak lasted 2 days (i.e. a win streak/losing streak ratio of 0.4).

Big Picture: Why Hedge Funds may be Bullish

Back in April, Zacks reported Carriage Services Inc.'s share price had entered oversold territory with a stochastic value of 4.873. Then this week the deathcare services and merchandise provider announced the results of its record first quarter performance: revenue increased by 13.2% to a record $58.1 million, adjusted basic earnings per share grew by 21.4% to a record $0.34 per share, and free cash flow soared by 314% to a record $9.1 million.

Beyond all that, Carriage is a pure play on the long baby boomer cycle. An aging population and an increasing number of deaths leads to increased demand for death care products. Strong revenue and inventory trends reinforce Carriage's role as the leading provider of deathcare products (funerals and cemetary services, coffins, etc) in the US. And by actively buying up smaller operators it appears Carriage has ample opportunity for growth.

 

2. Farmer Brothers Co. (FARM): Engages in the manufacture, wholesale, and distribution of coffee, tea, and culinary products in the United States.
  • Market cap at $241.18M, most recent closing price at $14.76.
  • Shares shorted have increased from 301.62K to 352.95K over the last month, an increase which represents about 3.27% of the company's float of 1.57M shares. Days to cover ratio at 8.33 days.
  • Net institutional purchases in the current quarter at 716.5K shares, which represents about 45.64% of the company's float of 1.57M shares.
  • The 2 top holders of the stock are Royce and Associates, LLC and Dimensional Fund Advisors LP.
  • Revenue grew by 2.99% during the most recent quarter ($135.71M vs. $131.77M y/y). Inventory grew by -12.53% during the same time period ($68.39M vs. $78.19M y/y). Inventory, as a percentage of current assets, decreased from 52.36% to 48.46% during the most recent quarter (comparing 3 months ending 2012-12-31 to 3 months ending 2011-12-31).

Why Shorts May be Bearish

Earnings expectations likely played a role here. FARM reported Q3 earnings on May 6. They slightly beat revenues and missed expectations on EPS, which came in at -$0.09 versus the expected $0.09 per share.

Big Picture: Why Hedge Funds may be Bullish

Within the same quarter, net sales rose by 4% to $126.3 million compared to $121.5 million in the third quarter of fiscal 2012. Additionally, the company's gross profit increased by 13% to $48.7 million versus last year's $43.1 million.

This bodes well for FARM's higher than average projected earnings growth rate over the next 5 years (20.0%). This is higher than the likes of Kellogg Company (projected EPS growth over next 5 years at 7.74%) and Unilever NV (projected EPS growth over next 5 years at 6.50%).

 

3. Ultratech, Inc. (UTEK): Develops, manufactures, and markets photolithography and laser thermal processing equipment.
  • Market cap at $855.47M, most recent closing price at $30.85.
  • Shares shorted have increased from 965.89K to 1.36M over the last month, an increase which represents about 1.47% of the company's float of 26.78M shares. Days to cover ratio at 3.61 days.
  • Net institutional purchases in the current quarter at 1.9M shares, which represents about 7.09% of the company's float of 26.78M shares.
  • The 2 top holders of the stock are Artisan Partners Limited Partnership and Wellington Management Company, LLP.
  • Revenue grew by 22.33% during the most recent quarter ($60.65M vs. $49.58M y/y). Inventory grew by 5.33% during the same time period ($53.39M vs. $50.69M y/y). Inventory, as a percentage of current assets, decreased from 14.96% to 13.% during the most recent quarter (comparing 3 months ending 2013-03-30 to 3 months ending 2012-03-31).

Why Shorts May be Bearish:

Back in April, Ultratech announced its first quarter of fiscal 2013 earnings, reporting net sales of $60.6 million compared to last year's first fiscal quarter. The semiconductor equipment maker's net income was $13.7 million, or $0.48 a share (diluted), versus last year's $10.2 million, or $0.38 a share (diluted). While Chairman and CEO Arthur W. Zafiropoulo expressed satisfaction with the company's performance, investors were less than impressed. Shares fell by 18% following the earnings release.

Things aren't looking so good for the second fiscal quarter either. According to Reuters, Ultratech may see a 25% drop in revenue compared to the first quarter of fiscal 2013.

Big Picture: Why Hedge Funds may be Bullish

Despite the disappointments Ultratech successfully grew both its revenue and its earnings per share versus a year earlier. The company also reported strong earnings growth over the last year, with EPS growing by 16.04%.

Going forward, UTEK's average projected earnings growth rate over the next 5 years is a respectable 15%, in line with the Semiconductor Equipment & Materials industry average of 16.2%. Furthermore, executives at Ultratech anticipate an increase in semiconductor capital equipment orders in the second half of 2013 for delivery in 2014.

*By Kapitall's Mary-Lynn Cesar. Institutional data sourced from Fidelity. Accounting data sourced from Google Finance. Short data sourced from Yahoo! Finance. All other data sourced from Finviz.

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