Most investors you meet fall in two categories: those who love to find and follow trends, and those who are contrarians and habitually go against the grain.

I’m not ashamed to admit that I fit into the latter category, following a Buffett-esque approach that pushes me to search for stocks that have fallen out of favor with the broader market. 

I’m also not ashamed to admit that I love stock screens. Anyone who has read my previous research can attest to that. I see them as a great way to uncover stocks that might not normally come across your desk.

#-ad_banner-#So what better way to combine my two investing loves than in a search for the latest, greatest reversal trades going into the end of 2014?  With the idea to source stocks that institutions love but markets hate, I set out to perform a multi-step screen to drill-down my investing universe. 

I started with a basic sort by market capitalization and stock price.  While this screen is pretty speculative in nature, I wanted to eliminate any extra risk due to tiny stock prices or micro-cap sizes.  As such, I made sure market caps were $750 million or greater and stock prices were north of $20 to be considered.

On the fundamental end, I needed positive price-to-earnings ratios to verify that the companies did indeed have earnings. I didn’t want any stocks trading at extreme premiums either, so I kept P/E under 20.    

To satisfy the “hated” end of my argument, there needed to be significant short interest.  In this case, I wanted to see more than 20% of shares held short. As a by-product, I expected stock prices to have suffered in the recent past as well, so I looked for stocks that had fallen at least 30% from their highs. 

Finally, I wanted to makes sure these stocks had good institutional support.  I took to my trusty 13D, 13G and 13F filings to see which of the remaining companies on the list received good buying pressure from hedge funds and big-name investors. 

When the dust cleared, I had whittled down a list of 6,960 stocks to just three.  Without further ado, let’s see which ones made the cut.

Neustar, Inc. (NYSE: NSR)
Neustar is in the business of helping its clients make informed, data-driven decisions. The list of happy customers goes on and on, including Lenovo, Forbes and Ticketmaster.

Despite a roster of satisfied customers, NSR stock tumbled 50% since the start of this year. The biggest slump came in January, when the stock dropped by almost 20%, even after announcing a very slight earnings beat.  Share prices have oscillated down since then, although NSR may have found support at the $24 mark where it’s currently trading. 

What could cause a rise-up again? Continued support from investors like Gotham Asset Management and Jackson Square Partners, who collectively own more than $112 million of NSR stock. The rumor mill is stirring in regards to Neustar seeing interest from private equity firms as well, which could be a big win for shareholders if a deal materializes and terms are favorable. 

Conns, Inc. (Nasdaq: CONN)
The well-known appliance retailer was founded more than 120 years ago, but it has seen the same economic pressure in recent times as competitors like Sears and Best Buy. The stock is down 32% in the past month alone, and it’s in the red by 61% since the start of 2014. 

Despite issuing positive earnings this past quarter, the actual reported earnings per share of $0.50 came in $0.25 lower than expected, with similar disappointments in the revenue department. Lower guidance and a reliance on in-house financing — leaving room for increased bad debt expense — has kept the stock price down as well.

However, recent institutional and insider buying support show commitment to CONN. One board member purchased 26,100 shares after the earnings announcement, and hedge fund Luxor Capital Group bumped up its holdings to $145 million as of the end of September.  More impressive is David Einhorn’s $173 million position through his fund Greenlight Capital. The stock popped 9% when he first disclosed his holdings in April. 

Walter Investment Management Corp. (NYSE: WAC)
WAC acts as a service provider to the residential mortgage industry, keeping a focus on credit-challenged (i.e. less than prime) mortgage assets.  When the government stepped in to reduce risk-taking by banks after the financial crisis, companies like WAC bought the rights to service those poor performing loans.

As you may have guessed, it hasn’t been smooth-sailing for WAC or its peers since then — given the nature of its business. Regulatory firms are now investigating WAC’s peers, and WAC shareholders think that it may be next, while new industry-wide rules loom that could affect profitability.   

The upside is that WAC is providing a service that big banks no longer perform, albeit with significant risk. Notable investors like Steven Cohen’s Point72 and First Pacific Advisors are still in the game, weathering the stock’s 45% downward spiral since this time last year.

Risks to consider:  Make no mistake, these stocks are currently weak and only belong in a contrarian’s portfolio. These are not picks for conservative investors, so treat them with the high risk they are due. Enter on an upswing versus trying to pick a bottom and have an exit strategy if these continue to break south.

Action to take –>  NSR could make for a great pop-up if a PE firm snatches it up, but if it loses any significant contracts before that, then the bottom could fall out. 

Conn’s is improving its business model by widening its same-store offerings, and it could begin a slow climb up if current price and “smart money” support holds.  

WAC’s previous support at $25 fell out in September, so I would shelve this idea until it forms a baseline again and more color on upcoming regulations is made public.

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