Contrarian Ideas: 3 Underestimated Companies for Your Watchlist

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Do you associate with the term "contrarian investor"? If so, you may be intrigued by the following three companies, all recently dumped by hedge funds but experiencing positive sentiment from company insiders. What's more, these companies also have a history of beating analyst expectations.

Institutional selling (net sales of a company from mutual funds, hedge funds, pensions, and bank trust departments) signals that sophisticated investors believe there is more downside than upside to the names. These firms often have more money and access to research than the average investor, and therefore are assumed to make better investment decisions.

If that's the case for the three names below, why are they attracting positive attention from their company insiders? Insider executives know a lot more about their company's prospects than most other investors, so if they're using their own money to buy the shares of their employers, it's probably a good idea to pay close attention to their bullishness.

More intriguing is that these companies have a history of positive earnings surprises -- meaning they have reported better-than-estimated earnings for several quarters. Do institutional investors think their winning streak is up?

The list
We screened a universe of companies with market caps above $300 million for net institutional selling in the current quarter and net insider buying in the past six months. We then searched for the names with track records of positive earnings surprises.

We were left with three companies.

Institutions are selling, but insiders think there's more upside to these names. Which group of investors do you think will be happiest with their trades? (Click here to access free, interactive tools to analyze these ideas.)

1. Kona Grill (NAS: KONA) : Operates upscale casual dining restaurants in the United States. In Dec 2010: Reported EPS at -0.05 vs. estimate at -0.06 (surprise of 16.7%). In Mar 2011: Reported EPS at -0.01 vs. estimate at -0.05 (surprise of 80%). In Jun 2011: Reported EPS at 0.11 vs. estimate at 0.04 (surprise of 175%). In Sep 2011: Reported 0.08 vs. estimate at 0.05 (surprise of 60%). [Average earnings surprise at 82.93%]. Net institutional sales in the current quarter at -206.7K shares, which represents about 3.57% of the company's float of 5.79M shares. Over the last six months, insiders were net buyers of 200,200 shares, which represents about 3.46% of the company's 5.79M share float.

2. Hercules Offshore (NAS: HERO) : Provides shallow-water drilling and marine services to the oil and natural gas exploration and production industry in the U.S. In Dec 2010: Reported EPS at -0.03 vs. estimate at -0.11 (surprise of 72.7%). In Mar 2011: Reported EPS at -0.12 vs. estimate at -0.13 (surprise of 7.7%). In Jun 2011: Reported EPS at -0.11 vs. estimate at -0.16 (surprise of 31.2%). In Sep 2011: Reported -0.12 vs. estimate at -0.14 (surprise of 14.3%). [Average earnings surprise at 31.47%]. Net institutional sales in the current quarter at -4.7M shares, which represents about 3.47% of the company's float of 135.30M shares. Over the last six months, insiders were net buyers of 32,000 shares, which represents about 0.02% of the company's 135.30M share float.

3. Lincoln Educational Services Corp. (NAS: LINC) : Provides career-oriented post-secondary education services in the United States. In Dec 2010: Reported EPS at 1.2 vs. estimate at 0.89 (surprise of 34.8%). In Mar 2011: Reported EPS at 0.46 vs. estimate at 0.36 (surprise of 27.8%). In Jun 2011: Reported EPS at 0.22 vs. estimate at 0.17 (surprise of 29.4%). In Sep 2011: Reported 0.13 vs. estimate at 0.1 (surprise of 30%). [Average earnings surprise at 30.5%]. Net institutional sales in the current quarter at -2.0M shares, which represents about 9.44% of the company's float of 21.18M shares. Over the last six months, insiders were net buyers of 291,384 shares, which represents about 1.38% of the company's 21.18M 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. List compiled by Eben Esterhuizen, CFA.

Kapitall's Eben Esterhuizen and Rebecca Lipman do not own any of the shares mentioned above. Institutional data sourced from Fidelity, EPS and insider data sourced from Yahoo! Finance.

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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