Contrarian Watch: Investors Continue to Exit Stock Mutual Funds

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August marks the third straight month of net selling out of stock mutual funds, a strong contrast to 2011's kickoff of net positive investments. Bond funds are also seeing net selling as investors retreat from volatility.

Over $32 billion was withdrawn in August between stock mutual funds and bond funds. This follows a hefty $23 billion withdrawal in July and $17 billion in June. (via Associated Press)

Even when balanced against the net deposits from the start of the year, U.S. year-to-date stock fund flows land in the red: $21.2 billion in net withdrawals. The numbers largely reflect investors' desires to seek refuge from the market given skepticism toward the economic recovery, debt issues in Europe, and volatile markets. But risk aversion doesn't affect all.

Enter the "contrarian."

Contrarian investors tend to go against the crowd and search for opportunity in unpopular positions.

One common mind-set of contrarians is that excessive sentiment (either bearish or bullish) can lead to a mispriced stock, which becomes an investing opportunity as the market corrects itself. That's not to say that pinpointing "excessive" sentiment is an easy task.

Contrarians use many strategies to find undervalued companies. One way is to look for stocks with bearish sentiment coupled with bullish indicators. Interested in finding contrarian ideas?

To help you get started, we identified a list of 200 stocks that have seen significant institutional selling during the current quarter.

Next, we collected data on insider trading and short trends and identified the stocks that have seen significant insider buying in conjunction with short covering (i.e., a decrease in shares shorted, meaning short-sellers think there's more upside than downside to these names).

Institutional managers have been dumping these stocks, but short-sellers and insiders seem to think most of the bad news is already priced in. Whose side are you on?

List sorted alphabetically. (Click here to access free, interactive tools to analyze these ideas.)

1. American Superconductor (NAS: AMSC) : Provides wind turbine designs and electrical control systems primarily in North America, Europe, and the Asia-Pacific. During the current quarter, net institutional holdings changed by -11.5M shares, a reduction representing about 29.43% of the company's float of 39.07M shares. Shares shorted have decreased from 10.30M to 9.83M over the last month, a decrease which represents about 1.2% of the company's float of 39.07M shares. Over the last six months, insiders were net buyers of 1,508,478 shares, which represents about 3.86% of the company's 39.07M share float.

2. ChinaCast Education (NAS: CAST) : Provides post-secondary education and e-learning services in China. During the current quarter, net institutional holdings changed by -8.1M shares, a reduction representing about 25.92% of the company's float of 31.25M shares. Shares shorted have decreased from 7.65M to 5.03M over the last month, a decrease which represents about 8.38% of the company's float of 31.25M shares. Over the last six months, insiders were net buyers of 317,802 shares, which represents about 1.02% of the company's 31.25M share float.

3. Pacific Sunwear of California (NAS: PSUN) : Operates as a retailer rooted in the action sports, fashion, and music influences of the California lifestyle. During the current quarter, net institutional holdings changed by -5.2M shares, a reduction representing about 14.5% of the company's float of 35.86M shares. Shares shorted have decreased from 10.43M to 9.71M over the last month, a decrease which represents about 2.01% of the company's float of 35.86M shares. Over the last six months, insiders were net buyers of 10,327,071 shares, which represents about 28.8% of the company's 35.86M share float.

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 Becca Lipman and Eben Esterhuizen does not own any of the shares mentioned above. Insider and Short data sourced from Yahoo! Finance. Institutional data sourced from Fidelity.

At the time this article was published 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.

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