Investing 101: Are Short-Sellers Underestimating These Companies?

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Interested in contrarian investing ideas?

The following is a list of stocks with a history of beating analyst estimates. But short-sellers don't feel so optimistic this earnings season -- the stocks below are also seeing an increase in short-selling.

Exploring the ideas
The concept of an earnings surprise is pretty straightforward -- the quarterly earnings come out, and earnings analysts are "surprised" by how they don't match up to their predictions. A surprise can indicate either positive or negative earnings, meaning the annual reports are above or below analysts' earnings estimates. For this list, we only use positive surprises.

Investors care about these "surprises" because when a stock releases data above expectations, the stock quickly adjusts to price in the new information.

Investors often look to short-seller trends to determine market sentiment. Short-sellers are investors that benefit from falling stock prices. If they are increasing their short positions on these names, it's a signal that they are becoming more pessimistic about their short-term performance.

Business section: Investing ideas
Contrarian investors tend to go against the crowd. One mind-set of contrarians is that excessive bearishness or bullishness, such as the bearishness shown by short-sellers, might signal that a stock is oversold or undervalued. If so, it may create an investing opportunity before the market value corrects itself.

These stocks have a track record of beating out analyst expectations; do you think this quarter will be any different? Or do you think short-sellers have it right? (Click here to access free, interactive tools to analyze these ideas.)

1. BroadSoft (NAS: BSFT) : Provides software that enables fixed-line, mobile, and cable service providers to deliver voice and multimedia services over Internet protocol (IP) based networks. In Dec. 2010: Reported EPS at 0.44 vs. estimate at 0.3 (surprise of 46.7%). In March 2011: Reported EPS at 0.18 vs. estimate at 0.12 (surprise of 50%). In June 2011: Reported EPS at 0.29 vs. estimate at 0.12 (surprise of 141.7%). In Sept. 2011: Reported 0.38 vs. estimate at 0.22 (surprise of 72.7%. [Average earnings surprise at 77.78%]. Shares shorted have increased from 6.50M to 6.82M over the last month, an increase which represents about 1.28% of the company's float of 24.93M shares.

2. Alleghany (NYS: Y) : Engages in the property and casualty, and surety insurance business. In Dec. 2010: Reported EPS at 4.76 vs. estimate at 3.59 (surprise of 32.6%). In March 2011: Reported EPS at 5.46 vs. estimate at 3.26 (surprise of 67.5%). In June 2011: Reported EPS at 3.02 vs. estimate at 2.22 (surprise of 36%). In Sept. 2011: Reported 2.75 vs. estimate at 2.43 (surprise of 13.2%. [Average earnings surprise at 37.33%]. Shares shorted have increased from 697.86K to 814.16K over the last month, an increase which represents about 2.08% of the company's float of 5.58M shares.

3. RSC Holdings (NYS: RRR) : Engages in the rental of construction and industrial equipment primarily in the United States and Canada. In Dec. 2010: Reported EPS at -0.07 vs. estimate at -0.09 (surprise of 22.2%). In March 2011: Reported EPS at -0.2 vs. estimate at -0.22 (surprise of 9.1%). In June 2011: Reported EPS at 0 vs. estimate at -0.01 (surprise of 100%). In Sept. 2011: Reported 0.15 vs. estimate at 0.14 (surprise of 7.1%. [Average earnings surprise at 34.6%]. Shares shorted have increased from 4.55M to 6.16M over the last month, an increase which represents about 2.6% of the company's float of 61.86M shares.

4. Saks (NYS: SKS) : Operates fashion retail stores in the United States. In Jan. 2011: Reported EPS at 0.13 vs. estimate at 0.08 (surprise of 62.5%). In April 2011: Reported EPS at 0.17 vs. estimate at 0.16 (surprise of 6.3%). In July 2011: Reported EPS at -0.05 vs. estimate at -0.09 (surprise of 44.4%). In Oct. 2011: Reported 0.11 vs. estimate at 0.09 (surprise of 22.2%. [Average earnings surprise at 33.85%]. Shares shorted have increased from 31.50M to 33.34M over the last month, an increase which represents about 1.81% of the company's float of 101.62M shares.

5. American Axle & Manufacturing Holdings: Engages in the manufacture, engineering, design, and validation of driveline and drivetrain systems, and related components and chassis modules for automotive industry in the United States. In Dec. 2010: Reported EPS at 0.47 vs. estimate at 0.39 (surprise of 20.5%). In March 2011: Reported EPS at 0.5 vs. estimate at 0.38 (surprise of 31.6%). In June 2011: Reported EPS at 0.65 vs. estimate at 0.44 (surprise of 47.7%). In Sept. 2011: Reported 0.48 vs. estimate at 0.43 (surprise of 11.6%. [Average earnings surprise at 27.85%]. Shares shorted have increased from 8.60M to 9.50M over the last month, an increase which represents about 1.43% of the company's float of 62.99M shares.

6. athenahealth: Provides ongoing billing, clinical-related, and other related services to medical group practices primarily in the United States. In Dec. 2010: Reported EPS at 0.28 vs. estimate at 0.2 (surprise of 40%). In March 2011: Reported EPS at 0.17 vs. estimate at 0.13 (surprise of 30.8%). In June 2011: Reported EPS at 0.22 vs. estimate at 0.18 (surprise of 22.2%). In Sept. 2011: Reported 0.24 vs. estimate at 0.21 (surprise of 14.3%. [Average earnings surprise at 26.82%]. Shares shorted have increased from 6.33M to 8.20M over the last month, an increase which represents about 5.42% of the company's float of 34.52M shares.

7. AmTrust Financial Services (NAS: AFSI) : Operates as a multinational specialty property and casualty insurance company in the United States and internationally. In Dec. 2010: Reported EPS at 0.57 vs. estimate at 0.53 (surprise of 7.5%). In March 2011: Reported EPS at 0.76 vs. estimate at 0.55 (surprise of 38.2%). In June 2011: Reported EPS at 0.83 vs. estimate at 0.59 (surprise of 40.7%). In Sept. 2011: Reported 0.68 vs. estimate at 0.61 (surprise of 11.5%. [Average earnings surprise at 24.47%]. Shares shorted have increased from 2.54M to 3.04M over the last month, an increase which represents about 2.82% of the company's float of 17.74M shares.

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 Rebecca Lipman and Eben Esterhuizen do not own any of the shares mentioned above. EPS data sourced from Yahoo! Finance.

At the time this article was published The Motley Fool owns shares of AmTrust Financial Services. The Fool owns shares of and has Protective Collar on AmTrust Financial Services. Motley Fool newsletter services have recommended buying shares of athenahealth and Alleghany. 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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