1 Contrarian Idea From 7 Stocks Trading Under $7

Chris is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Companies trading with a low share price tend to gyrate when there is more volatility. Even though the market capitalization and P/E should matter more, the psychology for “cheap” looking stocks could be prone to big moves. The net activity for these companies on the market may be measured by multiplying the number of shares traded in a day by the share price. Looking only by volume of shares traded, these companies often show up on the most-actively traded companies list. Is there a trading day when Nokia (NOK), which trades at $3.85, is not one of the most-actively traded companies?

To find contrarian investment ideas, an investor could look for a correlation between rising bearishness and rising share price. The table below is a selection of companies whose share price is below $7. Look at the change in short-selling compared to the change in share price against the 50-day moving average:

Table 1:

<table> <tbody> <tr> <td> <p><strong>NAME </strong></p> </td> <td> <p><strong>Short Vol. Open Interest Nov. 15</strong></p> </td> <td> <p><strong>Short Vol. Open Interest </strong></p> <p><strong>Oct. 31</strong></p> </td> <td> <p><strong>Avg. Volume</strong></p> </td> <td> <p><strong>% Chg</strong></p> </td> <td> <p><strong>% CHG FROM 50-DAY MA </strong></p> </td> </tr> <tr> <td> <p>OCZ Technology Group, Inc.</p> </td> <td> <p>17,865,922</p> </td> <td> <p>19,630,082</p> </td> <td> <p>1,694,492</p> </td> <td> <p><strong>-9.0%</strong></p> </td> <td> <p><strong>29.90%</strong></p> </td> </tr> <tr> <td> <p>Clearwire Corporation</p> </td> <td> <p>38,893,195</p> </td> <td> <p>50,870,997</p> </td> <td> <p>11,233,347</p> </td> <td> <p><strong>-23.5%</strong></p> </td> <td> <p><strong>10.78%</strong></p> </td> </tr> <tr> <td> <p>Glu Mobile, Inc.</p> </td> <td> <p>13,938,847</p> </td> <td> <p>14,495,085</p> </td> <td> <p>3,282,914</p> </td> <td> <p><strong>-3.8%</strong></p> </td> <td> <p><strong>-9.19%</strong></p> </td> </tr> <tr> <td> <p>SIRIUS XM Radio Inc.</p> </td> <td> <p>296,274,375</p> </td> <td> <p>297,872,278</p> </td> <td> <p>77,234,323</p> </td> <td> <p><strong>-1%</strong></p> </td> <td> <p><strong>-0.87%</strong></p> </td> </tr> <tr> <td> <p>RF Micro Devices Inc.</p> </td> <td> <p>13,992,725</p> </td> <td> <p>11,863,878</p> </td> <td> <p>5,320,981</p> </td> <td> <p><strong>17.9%</strong></p> </td> <td> <p><strong>5.93%</strong></p> </td> </tr> <tr> <td> <p>Groupon, Inc.</p> </td> <td> <p>43,533,791</p> </td> <td> <p>36,049,059</p> </td> <td> <p>27,480,602</p> </td> <td> <p><strong>20.8%</strong></p> </td> <td> <p><strong>21.76%</strong></p> </td> </tr> <tr> <td> <p>Micron Technology Inc.</p> </td> <td> <p>55,931,748</p> </td> <td> <p>61,066,639</p> </td> <td> <p>25,984,679</p> </td> <td> <p><strong>-8.4%</strong></p> </td> <td> <p><strong>12.45%</strong></p> </td> </tr> </tbody> </table>

Companies that are not candidates for making a contrarian position are:

1) OCZ Technology (OCZ) shares rose nearly 30% as short-sellers reduced their position. OCZ has yet to file its quarterly earnings and report results. When it does, look at inventory levels and cash flow.

2) Clearwire Corporation (CLWR) shares rose 10.78% as bearish investors reduced the short volume by 23.5%.

3) SIRIUS XM Radio Inc. (SIRI) shares are roughly flat from its 50-day moving average. Bearishness is also unchanged from October 31.

4) Micron Technology Inc. (MU) shares are rising, as DRAM prices are stabilizing. Short-sellers are also reducing their bearish position, as short volume declined to 55.9 million shares.

6-Month Performance:

<img src="/media/images/user_15008/ocz_large.jpg" />

Chart Source: Yahoo Finance

Companies that are candidates for making a contrarian position are:

5) Glu Mobile, Inc. (NASDAQ: GLUU) short-selling declined, even though shares dropped more than 9% from its 50-day moving average. The mobile game maker needs a hit. The game title releases also need to generate revenue, instead of being given away or produced at a loss.

6) RF Micro Devices Inc. (RFMD) shares rose above its 50-day moving average, while short-selling increased nearly 18%.

7) Groupon, Inc. (NASDAQ: GRPN), despite being a company whose business model is broken, gained bearish investors as short-selling increased 20.8%. Shares are 21.76% higher than its 50-week moving average. Groupon could be a contrarian play, if there are any fundamental developments. This would include a new CEO, partnerships with high-profile social networking sites, or evidence that new initiatives are generating profits. Investors are no longer accepting revenue growth without profit growth. 

6-Month Performance:

The contrarian Groupon 20%-20% short rise and price rise (above the 50-day moving average) could mean further upside ahead. The bearish conviction against the company may only weaken if the company makes big changes to its business model. Conversely, if talent keeps leaving and losses keep growing, short-sellers will eventually be proven correct.


<img src="/media/images/user_15008/grpn_large.jpg" />

Chart Source: Yahoo Finance

Data Source: finviz.com, Bloomberg.com

The Bottom Line

Groupon is no less speculative than the other companies that were explored. In the short-term, both sentiment and momentum is shifting positively for the company. A recent disclosure was made from Tiger Global Management. The hedge fund owns 9.9% of the company. Groupon is ultimately still trading at levels that assume the company is unable to make any profits in the future. Groupon has the brand name, and has the expertise. It just needs better execution. When that happens, shares will be seen in hindsight to have reached a bottom.

chrispycrunch has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

blog comments powered by Disqus